Rural Electrification Limited (RECLTD)- A Financial report

Summary

RECLTD, an Maharatna PSU Company is one of the most prominent financer for electricity projects across India. From past year, its stock price has seen an impressive surge in 240%. Does REC could sustain this price? or there is chance in growth of stock price from current levels?. This report covers all the fundamental key aspects of the company, along with technical analysis

Rural Electrification Limited (RECLTD)- A Financial report

Introduction-

RECLTD is an “Maharatna” public sector company which is involved in doing financing activities in power sector- both to government and private sector. It is an NBFC (non banking financial company) registered with RBI.

RECLTD was formed in 1969 as an subsidiary of PFC (Power finance corporation) which aimed to energise agricultural pump-sets for irrigation purposes, thereby reducing the dependency of agriculture on monsoons in the rural areas.

Since then, they have broaden their vision and expanded to finance power projects in areas of Roads & Expressways, Metro Rail, Airports, IT Communication, Social and Commercial Infrastructure (Educational Institution, Hospitals), Ports and Electro-Mechanical (E&M) works and in emerging sectors such as Electric Vehicles, Battery Storage, Green Hydrogen etc.

Services offered by the company

RECLTD plays a vital role in financing generation projects in India, with now focus on renewable energy and clean technologies. Here's an overview of loan options available through REC Ltd. for generation projects:

1.     Long-Term Loans: REC offers long-term loans with repayment periods of up to 18 years for hydro projects, 15 years for thermal projects, and 12 years for specific capital expenditure needs. 

2.     Project Finance Schemes: REC actively participates in project finance structures alongside commercial banks and other financial institutions. This approach helps raise larger amounts of capital for bigger projects.

3.     Concessional Loans: To incentivize renewable energy and clean technology adoption, REC offers concessional loans with lower interest rates compared to regular loans.

4.     Line of Credit: REC provides lines of credit to eligible borrowers for working capital requirements or specific project phases.

However there are some eligibility criteria which companies have to fulfil to borrow loans-

1.     The project should be located in India.

2.     The project should be commercially viable and have secured arrangements for produced electricity.

3.     The borrower should have a strong financial track record and adequate equity contribution (70 : 30 debt to equity minimum).

4.     The project must comply with environmental and social safeguard regulations.

Benefits of loans taken from RECLTD-

1.     REC offers loan at competitive interest rates compared to other financers, especially for renewable energy projects.

2.     Loan tenure from REC is much higher which allow for manageable installments and project revenue to cover loan costs.

3.     REC provides technical and financial expertise to project developers throughout the loan cycle.

4.     REC has a successful track record of financing diverse generation projects across India. 

REC Loanbook size- 

As on 30.09.2023, REC had a Loan Book of ₹4,11,148 Cr with State borrowers loans of ₹3,71,869 Cr and Private borrowers loans of ₹39,279 Cr.

The list of major borrowers is as follows-

Composition of loans-

Out of total loans, 39% of the amount is utilized in the power generation, 6% in renewable energy, 12% in transmission and 42% in power distribution.

Recently, the demand for loans in power generation for REC is declined, which shifted focus of company to allocate resources to other, emerging sectors viz. renewable energy whose loan portfolio increased from 3% previous year to 6% this FY.

Sector Analysis

The demand for power in India is increasing at much higher rate, which shows the high economic growth of India. The power demand is much increased in infrastructure sector.

The power sector in India is divided into three segments: (i) Generation, (ii) Transmission, and (iii) Distribution.

Generation is the process of producing electricity from different sources like thermal energy (coal, diesel, among others), nuclear and renewable sources such as sunlight and wind, natural gas, in generating stations or power generation plants. Transmission utilities transport large amount of electricity from power plants to distribution substations via a grid at high voltages.

At every stage, capital funding is required to ramp-up the capacity to meet the everlasting power demand, In India, there are 3 agencies who provide loans for power sector- REC, PFC and IREDA (for renewable energy). 

Indian power generation sector is one of the most diversified in the world. Electricity generation in India increased from 1,372 BU in Fiscal 2019 to 1,618 BU in Fiscal 2023, implying a CAGR of 4.2%. Electricity generation increased by about 6% year-on-year to 745 BU during April 2023 to August 2023. Thermal power forms the largest source of power in the country with about 75% of the electricity consumed being generated from thermal power plants.

Talking about capacity, The installed power capacity in India has increased from 356 GW in Fiscal 2019 to 416 GW in Fiscal 2023; it increased by 4% year-on-year as on September 2023 to 425 GW; India is the world's third-largest producer and second-largest user of energy.

According to CareEdge report, power financing loans has increased to ₹ 9,399 billion in 2023 indicating CAGR of nearly 10% over Fiscal 2019, which is supported by increase in demand for funds from power sector, and government’s push towards growth of power sector. In Fiscal 2024, power-financing NBFCs are expected to continue this growth momentum and this growth is likely to be driven by increase in power demand, rise in population, renewable integration and sustainability goals of the country.

NPA situation of the sector

There has been significant reduction in NPA in recent years, with 8.1% in FY 2019 to 3.6% in FY 2023. However these reduction is largely supported by write-offs, debt restructuring and increase in provisions of the NBFCs, which suggests that these improvement is not organic and there could be chance of increase in NPAs in coming years for the sector

Financials

RECLTD is posting strong growth every year with sales growth of 11-12% P.A. and increase in profits of around 20-25% P.A. which is mainly due to decrease in overall costs of borrowing.

In FY 2023, REC posted record revenue of Rs. 39,486 Crores, up by just 0.5% previous year and profits increased to Rs. 11,167 Crores, up by 11.2% previous year. The 96% of revenue came from the interest income from the loans

The ROE (Return on equity) figure stood strong and it is highest amongst its peers (PFC, IREDA) at 20%. However ROCE figures are comparatively less for the industry at 9.14% which is due to the high amount of debt taken by the company to finance the projects

The PEG Ratio (Price to earnings Growth) is at 0.44 times, which is low and means that there is much room for stock price to grow in near future, whereas the P/E stood at impressive 8.86 which makes company much attractive to buy.

There is no expenses related to the company and it makes naturally the OPM% as 100%. The majority of expense for the company being the interest payment of the debts taken by the company.

Corporate actions-

RECLTD is one of the highest paying dividend company in India, In last financial year, it gave Rs. 14.1 per share as dividend to its shareholders, at its lowest price of Rs.88 in same FY itself, it was impressive 16% Dividend yield. However in its current prices, it is around 3% per year

On March 2022, REC also announced stock bonus of 3:1, which suggests that company is cash rich.

Stock Price movement in past year

RECLTD’s share price has increased significantly from Rs. 123 past year to Rs. 428 on Jan 12, 2024. The stock has seen an uptrend rally for more than a year and based upon the valuations, it can continue to be in uptrend in near future. With its expansion and vision of solar energy, There is much significant chance for company to double its growth in near future.

SWOT Analysis-

1. Strengths-

·       Strong Momentum: Price above short, medium and long term moving averages

·       Company with high TTM EPS Growth

·       Effectively using its capital to generate profit - RoCE improving in last 2 years

·       Growth in Net Profit with increasing Profit Margin (QoQ)

·       Growth in Quarterly Net Profit with increasing Profit Margin (YoY)

·       Increasing Revenue every quarter for the past 3 quarters

·       Annual Net Profits improving for last 2 years

·       Company with Zero Promoter Pledge

·       FII / FPI or Institutions increasing their shareholding

 2. Weaknesses-

·      High Debt

3. Opportunities-

·       Highest Recovery from 52 Week Low

·       Decrease in Provision in recent results

·       Stock with Low PE (PE < = 10)

·       RSI indicating price strength

4. Threat-

·      N/A

Stock price Prediction-

According to research reports submitted by HDFC securities, PAT of RECLTD could increase from Rs. 42.41 in FY 2023 to Rs. 54 in FY 2024. If we consider median P/E of industry which comes at 14, The value of stock comes at Rs. 756. If we consider the current P/E of 8.86, the fair value comes at Rs. 478.

The prediction required EPS to increase to Rs. 54 in FY 2024. 

Technical Analysis-

The stock has seen a large uptrend rally from past year, and according to charts there are chances that it could sustain the rally required if there is no negative news in the near future.

In daily timeframe, the current resistance stood at Rs. 433, which then followed by Rs. 444 and Rs. 455. If the stock breaks the levels of Rs. 455 with volume, there is high chance that we could see levels of Rs. 491.8 and Rs. 528.3. At these levels too stock is not overvalued, which means that there is less chance of large selloffs by large investors.

The support levels stood at Rs. Rs. 412.7, followed by Rs. 397 and ultimately Rs. 378. If stock breaks support of Rs. 378, there is high chances of stock to go downtrend and we can see much lower levels after that