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master
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   Topic: Rural Electrification Corporation (REC)
Posted: 17/Oct/2011 at 7:31am |
Originally posted by Hrishi
Moreover, there was never a bad results from REC. I think it's 3 Yrs CAGR profit is something like 40%. With Current Dividend Yield of 4%+ and RoE of 20%+ . I could not understand the problem (if any) with the stock.
SEB's financial health problem, my reading is it is covered by state govt. undertakings. And will not be massive problem for company to handle.
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REC is NBFC but exempted from compliance of prudential norms till 2012 (or some future date) and not regulated/ inspected by RBI. Regulatory thing apart, exemption is because they do not fulfil the norms. I don't know how babus in min. of power can regulate a nbfc/fi.
Their auditors have commented on lack of internal controls in utilisation of subsidies, monitoring of SEB loans, restructuring viability etc. You may be aware they have a good chunk of their loans restructured so very low bad loans can't be taken on face value. We all know about the underlying quality of SEB and other state utilities in T&D.
Even if we take their public disclosures, i struggle to understand why pay more than 1x BV when better psu banks quote lower.
Since you're holding for long, your low avg price may still provide good margin of safety. For exposure in power sector, i feel equipment manufacturers & related suppliers could be a proxy.
Edited by master - 17/Oct/2011 at 7:33am
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Hrishi
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Posted: 17/Oct/2011 at 9:58am |
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Sir,
This is what i understand, if you can provide some numbers on NPAs and restructured loan, it will be of great help.
"REC has reported lower delinquencies and lower loan losses compared with commercial banks and other
financial institutions. In fact, it has reported significant improvement in its asset quality
since FY07 due to upgradation/recoveries of NPAs, with gross NPA declining to near zero levels by H1FY10 from 2.4% in FY07. The sharp decline in NPLs can be attributed to up-gradation of loans to defaulting states namely Mizoram and Manipur (as they have started meeting their obligation) and lending being protected by charge on assets, irrevocable state government guarantees, or obligation payment through default escrow account.
Though the company has not faced any major delinquency over FY05-08, it had, in the past, restructured its loans to state utilities. The total restructured assets stand at INR 22.7 bn (equivalent to 4% of its loan book). However, the positive trend is that there has
been no fresh restructuring in the past 3-4 years."
Case For REC:
Strong visibility of growth (Loan Book) due to huge investments planned in the power sector
Strong Domain Knoweldge in Power & T&D segment.
No regulatory constraints on deploying, funds; can maintain its assets in high-yielding segments
Low opex/asset ratio due to wholesale financing business
Eligibility of the tax benefits on the long term financing income with respect to special reserve created
Advisory services to kick in higher fee income.
Case Against PSU Banks:
Sectoral exposure capped at 15% of the net worth by RBI regulation.
With retail and corporate loan segment slowing down, PSU banks may see lower growth
Have to maintain SLR and CRR ratio as per RBI regulation
Asset quality may deterioate due to rising deliqunecy, primarily on the retail side
High operating expenses compared to REC
I am not an expert to comment on P/B it can or should enjoy. But the complete power story, visibility to loans books, disclosed numbers, growth, RoE and NIM looks good to me.
Master Sir, govt. all over the world are in problems. May be we are at better placed than many. But does it mean they will default. I consider it more of fear factor. and opportunity to add more .
And yes there are comments from Auditors, but i am not able to get any quantifiable data/impact. What are the public disclosures you are talking about?
Due to my last buy at 380, i am not in much profit now with REC.
Anyways i will study more. I was in comfort zone. Your questions will make me read more deeper and come back in few weeks.
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wiseowl
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Posted: 17/Oct/2011 at 11:47am |
Originally posted by Hrishi
Strong visibility of growth (Loan Book) due to huge investments planned in the power sector
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But the timing of disbursements could get stretched.
No regulatory constraints on deploying, funds; can maintain its assets in high-yielding segments
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Now that it has been granted the stuatus of an IFC, regulatory constraints will kick in. It is good for the stock in the long term, though. Even though loans given to SEBs are implicitly backed by State Governments, the promised backing could come in the form of bonds rather than cash. Then REC needs to raise extra cash to fund its long term growth.
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You alone are responsible for your actions.
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master
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Posted: 18/Oct/2011 at 10:41pm |
Originally posted by Hrishi
Your questions will make me read more deeper and come back in few weeks. |
Hrishi ji, I don’t want to dig up AR of REC because I have absolutely no interest in this stock. Your post and Admin ji creating a new thread has made me write few more points, that’s TED:
1. Without taking you into technicalities, consider a simple case. You’ve Rs 100 to invest and no rules are imposed upon you. Will you invest all of it in power sector? Answer is big no. These guys have no choice but to do that. Secondly, will you invest 82% in financially weak entities SEBs/T&D state utilities, half of whom do not prepare proper accounts? Answer is again the same.
2. REC or PFC or IDFC has a limitation by their statute. But as a small investor we have none. So why would one not go for a Corporation bank, Indian Bank etc. that can invest upto a ceiling in any sector it considers investment-worthy, if govt backing is what you’re looking for.
4. To me their glorious results y-o-y look an “evergreen” joke. But the whole show suits all concerned so keep it going till a mishap occurs.
5. Fund raising avenues are allowed that provide 54EC and 80DD breaks, these constitute 75% of their outside borrowings. Will they be able to raise adequate resources if these artificially induced sops are withdrawn.
6. Business model is handicapped because fee & non-interest income is miniscule.
I don’t mean to discourage you from investing here. We never know stock can do extremely well.
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subu76
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Posted: 18/Oct/2011 at 10:55pm |
Good post. Looks like you've done deep research on this company
Edited by subu76 - 18/Oct/2011 at 10:59pm
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basant
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Posted: 18/Oct/2011 at 11:46pm |
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Master: Very strong and relevant argument.
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Hrishi
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Posted: 18/Oct/2011 at 12:22pm |
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Master Ji,
Most of your points are really well known. (i was not aware of NPA rules, but others yes known.) So what are you driving at? Is it a loss making business, with numbers played by mgmt?
If you are questioning results and calling it a Joke. Which is very serious allegations. Please point to some example with data in there published results it will be of great help.
I am still not among those who can read through the Financial sheets and identify the problems. But i will attempt it this time, in next few weeks. Just need a little help here.
Either way it will be helpful to clear it.
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prudentinvestor
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Posted: 18/Oct/2011 at 12:44pm |
Originally posted by Hrishi
Master Ji,
If you are questioning results and calling it a Joke. Which is very serious allegations. Please point to some example with data in there published results it will be of great help.
I am still not among those who can read through the Financial sheets and identify the problems. But i will attempt it this time, in next few weeks. Just need a little help here.
Either way it will be helpful to clear it.
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Hi Hrisihi ji, What master mentioned is not about potential fraud in REC's financials or otherwise. The main point is the fuzzy practices of all these PSUs in general. REC lending to almost bankrupt State Electricity Boards SEBs default REC writes off bad debts(loans) Govt brings another FPO and recapitalizes REC REC again starts lending to SEBs.... And the story will go in, ultimately PSUs are at a total mess. So although the financials look impeccable take those with a pinch of salt. Given the huge power requirement, companies like PFC and REC are bound to get good business, but given the shady state of asset quality and huge exposure to ailing SEBs one needs to be cautious. ps: The stock is highly volatile and a trader's delight. Be ready to brace extreme volatility if you want to invest for long.
Edited by prudentinvestor - 18/Oct/2011 at 12:45pm
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"All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don’t work out..” - Peter Lynch
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