Lower credit cost to support REC’s earnings
Margins may remain under pressure; liquidity, availability of funds not major concerns
The Rural Electrification Corporation (REC) stock has corrected over 13 per cent over the last five trading sessions. Though the REC is unlikely to feel the sharp hit in terms of liquidity and funding availability like its NBFC peers, weak sentiment has impacted the power financier as well.
“REC being a government entity, there should not be serious concerns on fund raising. However, margin pressure is likely in the near term as some portion of the borrowings will mature by
FY19. But, REC also has pricing power,” says an analyst.
REC will see net interest margin (NIM) pressure in the near term due to a weak rupee and elevated levels of yields, given 84 per cent borrowings as of June 2018 are from the bond market, including commercial papers. NIM is the difference between interest earned and expensed as a percentage of average interest-earning assets. The management says it can easily pass on the high cost pressure to borrowers but with some time lag.
Analysts expects NIM of
REC to decline 49 basis points in FY19 and will recover in subsequent years.
However, REC is likely to benefit from lower credit cost (provisioning as a percentage of average loan book).
Even in the June quarter, a 37 per cent year-on-year growth in net profit was led by lower provisions, besides higher other income.
More than 86 per cent of REC’s advances are to the government, typically backed by government guarantees, and are standard as of June 2016. About 24 per cent of loans are to private companies,
of which close to 60 per cent (~196.5 billion) are already recognised as bad loans or non-performing assets (NPAs), indicating lower
additional slippages in the near future. REC has already provided over 47 per cent towards these bad loans and the management expects 4050 per cent recoveries from these NPAs. Analysts expects credit cost of RECs to come down to 0.4 per cent from 0.6 per cent in FY18.
Moreover, support for earnings could stem from expected improvement in the loan book. REC, a nodal agency for operationalisation of the Centre’s Saubhagya scheme, believes 17.5 million households need to be electrified by 2018.