Rural Electrification Corporation (REC)
Printed From: The Equity Desk
Category: Investment Ideas - Creating winning portfolios!
Forum Name: Stock Synopsis
Forum Discription: A bried discussion of companies on very specific matters. Normally this is the prelude for further research as always members would be discussing quality companies with good management only
URL: http://www.theequitydesk.com/forum/forum_posts.asp?TID=3437
Printed Date: 21/Apr/2025 at 11:27pm
Topic: Rural Electrification Corporation (REC)
Posted By: master
Subject: Rural Electrification Corporation (REC)
Date Posted: 17/Oct/2011 at 7:31am
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. ------------- Someone’s sitting in shade today because someone planted a tree long time ago. |
Replies:
Posted By: Hrishi
Date 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. |
Posted By: wiseowl
Date Posted: 17/Oct/2011 at 11:47am
But the timing of disbursements could get stretched.
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. ------------- You alone are responsible for your actions. |
Posted By: master
Date Posted: 18/Oct/2011 at 10:41pm
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:
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.
3. Prudential norms are modified by REC to suit their convenience (come on, if you’ve no regulator you can do whatever you like). How many of their shareholders and analysts who write stock reports know that they don’t recognize a NPA before 6 months, likewise for so many other norms. Check this link: http://recindia.nic.in/download/pru_norms.pdf - http://recindia.nic.in/download/pru_norms.pdf - http://recindia.nic.in/download/pru_norms.pdf
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. ------------- Someone’s sitting in shade today because someone planted a tree long time ago. |
Posted By: subu76
Date Posted: 18/Oct/2011 at 10:55pm
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Good post. Looks like you've done deep research on this company |
Posted By: basant
Date Posted: 18/Oct/2011 at 11:46pm
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Master: Very strong and relevant argument. ------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: Hrishi
Date 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. |
Posted By: prudentinvestor
Date Posted: 18/Oct/2011 at 12:44pm
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. ------------- "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 |
Posted By: Hrishi
Date Posted: 18/Oct/2011 at 12:57pm
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Sir Ji,
This is what exactly data i am asking for /looking for. SEBs default & REC writes off bad debts(loans) in numbers. This should be in numbers reflected somewhere.... If one can show it in annual reports, published numbers, i am convinced and out of it. Case closed. Till now, all i was reading was close to Zero NPA's in their reports. It is my lack of skills in reading through Financial tables, i never attempted it in the past and believed on published numbers, reports and equity web site to get the data. I do care about my hard earned money. 
And i am not here with some emotional connect with company to defend. But data /numbers is what i am looking for and take the learning's ahead. |
Posted By: Hrishi
Date Posted: 18/Oct/2011 at 1:10am
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Few links..
http://www.moneycontrol.com/news/cnbc-tv18-comments/banks-to-stop-loans-to-loss-making-state-electricity-boards_566889.html http://www.firstpost.com/economy/rs-100000-cr-seb-debt-bomb-is-waiting-to-explode-39498.html http://www.rareinfrastructure.com/2011/04/18/india%E2%80%99s-state-electricity-boards-%E2%80%93-an-unfolding-crisis/ http://www.livemint.com/2011/06/26203823/Bankers-face-loan-default-risk.html |
Posted By: subu76
Date Posted: 18/Oct/2011 at 7:28am
Hrishi, I'd say you really need to speak to some of REC's customers/employees. These things don't show up on ARs. Everyone involved is very interested in keeping the game going for a long time. As long as such companies can keep the music playing and ensure a decent stock price (so that they can sell more stocks) no one will know what is going on. This is the reflexivity principal playing out for this company and for a few other small wonder banks which earn record profits every year through "innovation" which no one can explain as you're only supposed to marvel about it. |
Posted By: master
Date Posted: 18/Oct/2011 at 9:04am
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You want data – the final frontier. For an institutional type of business like this, what’s source of data for a small investor other than a glossy AR with nice pictures. Anyway, made me look up AR2011 and work for free:
 1. Page 77 - Schedule 7:
See (i) (c) SPUs/SEBs etc, on unsecured loans of Rs 21,904 cr , interest accrued on rescheduled loans is Rs 363 cr and for other normal loans is just Rs 4 cr, see the figures for 2010 Rs 432cr and 8 cr, so as % how much of this 21k should be under reschedulements. Do you think it will ever be classified.
See (iii) - on Rs 7,842 cr loans, interest accrued for restructured loans Rs 35 cr and same way.
2. Page 120 - Item 34:
Closing balance of principal rescheduled – Rs 8,223 cr and interest Rs 717 cr, On a gross book of Rs 82,132 cr, this is about 10%.
Is this stated position consistent with (1) above.
3. And what prevents them from sanctioning a new loan (STL) when a large payment falls due. Which NPA and delinquency are we talking about. 4. Quality of Prudential norms are discussed before. 5. Look at the macro picture for T&D utilities – coal supplies drying up, operating costs going up, borrowing costs increasing, elections in next 2 years – from here, you expect fiscal discipline to improve or deteriorate? 6. Page 96 – Item iv - Annexure to auditors report: You want an auditor to say more than this and get his fee. But the good thing is management has said they will make efforts to strengthen all these areas. Let us promptly add, they will continue glorious results and stock can do extremely well. ------------- Someone’s sitting in shade today because someone planted a tree long time ago. |
Posted By: Hrishi
Date Posted: 19/Oct/2011 at 8:16pm
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Master Ji,
Thanks so much for pointing me at right places to look at. Next few days, i will try to read through every line and understand it in the Annual Report. (Are there any books, which I can get help from in these financial learning.) Till now, use to read the Director's Report, Management Discussion and few more items and done with it. Never went to schedules and annexure. It is a learning indeed. And if master want's to charge for it, by all means...
I am neither into this just to make money, though it is important, more important is to learn and earn. ELSE will be obsolete pretty early. After learning/reading through similar practices in SKF from an article, i left it completely. And formed few rules for myself to select a company for investing. On this new learning, I will spend much more time and redefine the selection criteria for the companies in my portfolio. Thanks. |
Posted By: hemtan100
Date Posted: 19/Oct/2011 at 11:38pm
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very valid points and very well done homework :)
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Posted By: manish_54
Date Posted: 22/Oct/2011 at 10:56am
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Hi
I am a new boarder and excuse me if I have another idea. If we are really reading between the lines than entire Indian economy is at risk. Reliance who is sitting on huge case pile of 30K is paying 660 crores as interest. IF entire power sector is going fail, what is safe then. In my opinion, you guys are reading in too much, see the larger picture and invest. what is per capita power consumption in India. What is the growth opportunities. Do not just look at the negative numbers. If two of the large entities having loan book worth 1.5 lac crores (PFC/REC) are not going to survive and banks are going to doom doom, tell me what is safe, specially when all these loans are backed up by Govt (State and central). Stock market is always a risky proposition and you need to be more daring apart from reading reports. Good luck to all who invest or do not invest in markets. |
Posted By: master
Date Posted: 23/Oct/2011 at 9:01pm
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Tardy progress in power sector reforms is now beginning to take its toll.
As per recent CRISIL report “Around Rs 56,000 crore of these lenders’ exposure is potentially at risk, if there is no meaningful progress on reforms in the next 18 months,”
Link http://www.dnaindia.com/money/report_power-trip-rs56000-crore-loans-at-risk-for-banks_1600985 -
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Posted By: Kautilya
Date Posted: 21/Dec/2011 at 1:18pm
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As per a research report, the mess created by SEBs could take a long time to resolve. The planning commission has apparently released a report on the financial position of SEBs and has proposed several reforms in order to improve the health of SEBs such as setting up of SPVs that will purchase loans from banks. These SPVs are expected to be funded by a credit line from RBI (there could be preconditions such as regular tariff hikes, reduce distribution losses etc.,) Some interesting points I thought worth of sharing1. Accumulated losses of SEBs from FY06-FY10 is about Rs1790 bn
2. Over 70% of these are financed by PSU banks :(
3. Government bodies have a deplorable record in paying electricity bills
4. Financial records are in poor state and there are delays in supply of audited financials which impacts tariff setting
4. SERC functioning has been inadequate
Hope this helps people who are tracking this sector (utilities and capital goods in general) ------------- My indecision is final. |
Posted By: TCSer
Date Posted: 22/Dec/2011 at 11:56pm
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But the monopoly these SEBs have over distribution will come to their rescue as customers hv no option but to go with them,With large no of SEBs like TN,Delhi,Rajasthan hv already increased the price n after elections UP too may do the same .Except for WB & ultra left Mamta other states shud be ok.But yes rishvatkhor JE<AR<EE emaiiinsa big problem. ------------- Share market is nothing but a game of temperament. Success mantra Right Price,Right Business,Patience, Conviction .Do not do panic buying or selling.It may be the only profession where inactivity pays |
Posted By: excel_monkey
Date Posted: 22/Dec/2011 at 12:13pm
By the time SEBs come out of their issues (if they ever) we would be bankrupt 5 times
------------- I have a vested interest in the stocks I discuss, therefore I would request you to kindly consider my comments with a pinch of salt and do your own due diligence |
Posted By: wiseowl
Date Posted: 22/Dec/2011 at 10:53am
This has been the situation all the while ; the SEBs are in a mess inspite of this. The solution is not raising the tariff but proper management by reducing the T&D losses. ------------- You alone are responsible for your actions. |
Posted By: Kautilya
Date Posted: 22/Dec/2011 at 11:03am
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In the meanwhile the current state of affairs of the SEBs will continue atleast till the next general election (The last thing the govt would do is raise tariffs and franchise the Transmission and Distrubution business before an election). So anybody investing in these sectors should be wary of this. ------------- My indecision is final. |