Recommendation from Finance corporation

This section gives a recommendation of a stock having a stock price below Rs 150 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

REC LTD: MAKING THE POWER WHEELS TURN FASTER

HERE IS WHY
✓Expansion in business offerings
✓Consistent operational excellence
✓Attractive valuation

I n India, public sector companies have shown remarkable performance on the bourses during the current fiscal year. While the S and P BSE PSU index has generated a return of 16.16 per cent in a year, Sensex has stood flat with a growth of only 0.58 per cent. In tune with the rising demand for electricity, the government’s emphasis on ‘electricity for all’ and the shift toward renewable energy, power stocks are now under the limelight. Furthermore, public sector financial institutions, including banks, have also performed significantly well on account of improved asset quality along with strong credit growth.

Given this scenario, our recommendation for this issue is Rural Electrification Corporation (REC). Incorporated in 1969, REC is a central public sector undertaking of the Ministry of Power that finances projects across the entire power sector value chain from generation to distribution. REC collaborates with the Ministry of Power, Government of India on major initiatives to improve the country’s power distribution sector. REC’s product portfolio includes financial products and services for various power projects in the generation, transmission and distribution sectors, such as project term loans, short-term loans, equipmentlease financing and consultancy services, among others.

As a quasi-sovereign financial institution, REC can manage a diverse resource profile and raise funds at low cost from a variety of sources, including external commercial borrowings (ECBs), domestic financial institutions, long-term bonds, bank loans, commercial papers, infrastructure bonds and tax-free bonds. REC has expanded its business offerings to include the financing of infrastructure development projects such as metros. In accordance with this, REC has signed a ₹14,434 crore loan agreement with the Mumbai MetropolitanRegion Development Authority (MMRDA) for nine metro projects being developed in the Mumbai Metropolitan Region (MMR).

In the recent quarter of Q2FY23, REC’s total income grew by 5 per cent YoY to ₹9,949 crore from ₹9,469 crore. Net profit stood at ₹2,728 crore in Q2FY23 compared to ₹2,447 crore in Q2FY22, a YoY growth of 11 per cent. The loan book grew by 2 per cent to ₹3.94 lakh crore as of Q2FY23. 

The increase in loan book resulted in reduction in the net credit-impaired assets to 1.24 per cent with provision coverage ratio of 69.28 per cent as on Q2FY23. The capital adequacy ratio (CAR) stood at 25.15 per cent as on September 30, 2022, implying ample opportunities to support business growth. REC is currently trading at a PE of 3.18x over its long-term PE of 3.4x with current ROE and ROCE of 21.39 per cent and 9.10 per cent, respectively. The company has a price-to-book value and PEG ratio of 0.62 times (long-term average of 0.7x) and 0.33, respectively.

These ratios show that the shares of the company are available at an attractive valuation. The best part about REC is its huge dividend yield in high single digit. REC plays an important role in the Indian power sector, not only by providing financing but also by implementing and taking ahead the government’s power sector policies. Also, given the government’s increasing support for the power sector that also includes a strong focus on a major shift towards the use of renewable energy, REC stands to benefit in the long run. Looking at such growth opportunities in tandem with the company’s attractive valuation and higher dividend yield, we recommend BUY.