REC Limited’s Signed MoU with PNB Sparks 6.38% Surge in Share Price:
Company Overview:
Rural Electrification Corporation LTD (RECL) is a significant player in the Indian power and infrastructure sector, serving both state-owned utilities and private companies. It plays a pivotal role in the nation’s electrification efforts and has witnessed substantial growth over the past five years. This analysis delves into the company’s activities, financial performance, and key trends.
REC Limited’s Signed MoU with PNB Sparks 6.38% Surge in Share Price:
On September 26, 2023, REC Limited made a significant stride in the financial world by forging a strategic Memorandum of Understanding (MoU) with Punjab National Bank (PNB). This landmark agreement paves the way for both entities to co-finance an impressive sum of Rs. 55,000 Crore over the next three years, dedicated to fueling infrastructure, power, and logistics projects under consortium arrangements. This exciting development sent shockwaves through the market, causing REC Limited’s share price to skyrocket by 6.38% in a single day, marking a remarkable 17-point jump to reach a trading price of 284 Rs. Investors and stakeholders alike are buzzing with anticipation as REC and PNB unite to power India’s growth and development in the coming years.
Funding Allocation and Growth:
RECL’s core function involves providing interest-bearing loans to various segments of the power sector, including generation, transmission, distribution, logistics, and renewables. In FY23, the company experienced remarkable growth, with total sanctions increasing by an impressive 393% year-on-year (YoY) to 2,68,461 Cr compared to 54,421 Cr in FY22. The highest sector-wise allocation of these funds was in logistics and infrastructure at 32%, followed by transmission and distribution at 30%.
Loan Disbursements and Portfolio Composition:
In terms of disbursements, generation accounted for 26%, distribution 25%, renewables 13%, and transmission 31%. In FY23, total disbursements grew by 51% YoY to 96,846 Cr compared to 64,150 Cr in FY22. Notably, over 90% of RECL’s loans are extended to state entities, resulting in a low likelihood of asset conversion into non-performing assets (NPAs).
Q1FY24 Results Update:
In Q1FY24, RECL experienced a 12% YoY decrease in net interest income, which amounted to 3,412 Cr compared to 3,880 Cr in Q1FY23. This decline can be attributed to a 50 bps increase in the cost of funds and a 25 bps decrease in the yield on loans. However, the pre-provision operating profit (PPOP) increased by 9% to 3,770 Cr, primarily due to operational efficiency improvements, including a reduction in operating expenses.
Asset Quality and Capital Adequacy & Key Ratios:
Asset quality improved significantly in Q1FY24, with gross NPAs declining to 3.28% from 4.41% in Q1FY23, a 1.13% YoY decrease. Net NPAs also saw a reduction, decreasing by 0.44% YoY to 0.97% in Q1FY24 compared to 1.41% in Q1FY23. The provision coverage ratio increased to 70.46% in Q1FY24 from 68.08% in Q1FY23. The capital adequacy ratio stood strong at 27.67% in Q1FY24, comprising tier 1 capital at 24.67% and tier 2 at 2.93%. Return on equity (ROE) also improved, reaching 19.98% in Q1FY24 compared to 18.9% in Q1FY23, reflecting a 1.08% YoY increase.
Margin and Spread Challenges:
RECL faced challenges in its core lending business, as the net interest margin (NIMS) declined by approximately 80 bps to 3.28% in Q1FY24, significantly lower than the industry average. The company’s cost of funds increased by 50 bps YoY to 7.23%, while the yield on funds decreased by 25 bps to 9.82% in Q1FY24, affecting the spread.
Conclusions:
RECL continues to play a crucial role in funding India’s power and infrastructure sectors. While facing challenges in its lending business, the company has shown resilience and adaptability, particularly in focusing on renewable energy sources. The improving asset quality and robust capital position bode well for its future endeavors.