Fundamental Analysis of REC: The Government of India is pursuing the target of achieving 500 GW of renewable energy capacity by 2030, which is expected to drive significant investment in the sector. In this article, we will be analyzing one such company that is involved in financing this sector particularly.
Table of Contents
Fundamental Analysis of REC
Company Overview
Established in 1969, to energize agricultural pump-sets for irrigation purposes to reduce the dependency of agriculture on monsoons, REC Limited is registered with RBI as a Non-Banking Finance Company (NBFC), Public Financial Institution (PFI), and Infrastructure Financing Company (IFC).
REC provides long-term loans and other financing products to State, Centre, and Private Companies to create infrastructure assets in the country. It finances power sector infrastructure, renewable energy & new technologies, and infrastructure & logistics sector (non-power). It has a countrywide presence through 22 state offices.
The company also played an important role in the projects of the Government in the power sector and was associated with many government schemes.
Segment Analysis
The company operates only one business segment, i.e. lending to the power, logistics, and infrastructure sectors. Classifying revenue based on major products or services offered,
| Particulars | Contribution |
|---|---|
| Income from Loan Assets | 98.18% |
| Fee for Implementation of Govt. Schemes | 0.31% |
| Income from Treasury Operations | 0.78% |
| Revenue from the sale of services | 0.73% |
Industry Overview
India has emerged as a significant force in the global energy economy. The post-pandemic economic recovery and adverse weather conditions drove an 8.4% increase in electricity demand in India. The diverse business climate and large consumer base in India are driving the country’s rapid economic expansion. With its solid macroeconomic fundamentals and smart fiscal policies, India ranks fifth in the world in GDP, with a target of USD 5 trillion by 2025. The Economic Survey predicts a 6.5% growth rate for 2023-24.
Meanwhile, persistent economic development, reforms, and supporting policies are propelling India’s electricity sector forward. A 9.5% increase in energy demand in 2022-23 demonstrates its intensity. With a focus on renewable energy, India wants to replace 50% of its existing capacity with non-fossil fuel-based sources by 2030, resulting in further growth and long-term sustainability. The Government of India is also rolling out several reforms to strengthen the distribution sector.
As the Indian economy continues to grow fast, with a growing population and the current low level of per-capita electricity consumption, the future outlook for investments in the power sector is quite promising over the long term.
REC – Financials
Let’s look into the financials of the company.
Revenue & Net Profit
The financial statement of the company indicates that the revenue has increased by 0.5 percent from ₹ 39269 Crores to ₹ 39478 Crores from FY22 to FY23 respectively. On a 4-year CAGR basis company grew by 11.66 percent. The revenue has been increasing consistently and REC’s loan portfolio was categorized as 39% into generation projects, 11% into transmission projects, 37% into distribution projects, 7% into renewable energy projects, and 6% in STL/RBPF as of March 31, 2023.
The net profits of the company have increased by 11 percent from ₹10036 Crores in FY22 to ₹11167 Crores in FY23. On a 4-year CAGR basis the company has grown by 18.10% percent, indicating a good growth.
| Fiscal Year | Revenue from operations (In Crores) | Net Profit (In Crores) |
|---|---|---|
| 2023 | 39,478.26 | 11,166.98 |
| 2022 | 39,269.05 | 10,035.70 |
| 2021 | 35,552.84 | 8,378.24 |
| 2020 | 29,903.93 | 4,972.27 |
| 2019 | 25,399.02 | 5,741.38 |
| 4-year CAGR | 11.66% | 18.10% |
Profit Margins
REC reported a 7.6 percent rise in operating profit margin (OPM) and a 2.73 percent rise in net profit margin (NPM) from FY22 to FY23. Though there has been a fall in profit margins, the margins were able to beat the 5-year average of 15.45 percent and 7.52 percent respectively.
REC has been raising funds at consistently competitive rates which forms the basis of profitability in financing business. The overall weighted average annualized cost of funds for the outstanding borrowing as of March 31, 2023, was 7.28% as it enjoys an “AAA” rating from CRISIL, CARE, India Ratings & Research, and ICRA for its domestic debt instruments and international rating of “Baa3” and “BBB-” rating from Moody’s and FITCH respectively.
The OPM and NPM show such differences as it is an NBFC and it has very low operating costs and high financing costs.
| Fiscal Year | Operating Profit Margin | Net Profit Margin |
|---|---|---|
| 2023 | 95.30% | 28.29% |
| 2022 | 87.71% | 25.56% |
| 2021 | 90.74% | 23.57% |
| 2020 | 86.65% | 16.57% |
| 2019 | 93.35% | 22.57% |
| 5-year average | 90.75% | 23.31% |
Return Ratios
Return on Capital Employed increased by 0.04% from 9.1% in FY22 to 9.14% in FY23 but considering the 5-year trend, the RoCE has remained at same levels. On a 5-year average basis, ROCE stands at 9.08%.
Return on Equity reported a 0.74% fall from 21.36% in FY22 to 20.62% in FY23. Considering a longer perspective, RoE has increased by 3.5%. On 5 year average basis, RoE stands at 18.91%.
RoCE is low compared to RoE as the debt of the company is greater compared to the equity value, increasing the denominator of the ratio.
| Fiscal Year | RoCE | RoE |
|---|---|---|
| 2023 | 9.14% | 20.62% |
| 2022 | 9.10% | 21.36% |
| 2021 | 9.28% | 21.32% |
| 2020 | 8.67% | 14.19% |
| 2019 | 9.21% | 17.07% |
| 5-year average | 9.08% | 18.91% |
Leverage Ratios
The Debt-Equity Ratio is 6.55 times in FY23. On a longer perspective, the ratio has decreased by 0.52. Due to high debt, the interest converge ratio has been low but increasing.
As REC is an NBFC, the company has to borrow to provide loans and advances, so high debt to equity is not a warning sign.
| Fiscal Year | Debt / Equity (Times) | Interest Coverage Ratio (Times) |
|---|---|---|
| 2023 | 6.55 | 1.59 |
| 2022 | 6.49 | 1.56 |
| 2021 | 7.53 | 1.5 |
| 2020 | 8.09 | 1.37 |
| 2019 | 7.07 | 1.52 |
| 5-year average | 7.15 | 1.51 |
The sector-wise breakup of sanctions and disbursements in FY23
Source: Investor Presentation
Source: Investor Presentation
Major Borrowers
Key Metrics
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| CMP | ₹ 491.65 | Market Cap(Cr) | ₹ 1,14,374 |
| EPS | 48.38 | Stock P/E | 8.11 |
| RoE | 20.11% | RoCE | 8.94% |
| Promoter Holdings | 52.63 | FII Holdings | 21.51 |
| Debt to Equity | 6.55 | P/B | 1.64 |
| Operating Profit Margin | 95.30% | Net Profit Margin | 28.27% |
Rural Electrification Corporation – Future Plans
- REC has sanctioned more than ₹85,700 crores towards various projects spanning from Metro, Ports, Airports, Oil Refineries, Highways, and Steel Infra to Healthcare, Educational Institutions, and also in sectors of IT Infra/ Fiber Optics, etc. constituting about 32% of overall sanctions.
- REC aims to increase its present loan portfolio of Green Projects to an extent of more than ten times by the year 2030 amounting to ₹3 lakh crore.
- Aims to achieve a loan book of more than ₹10 lakh crore by March 2030.
- Net zero NPA company by the year 2025.
Conclusion
As we conclude the article on the Fundamental Analysis of REC Limited, we have looked into its business, industry, financials, and future outlook. The company looks optimistic and has higher growth opportunities. Non-Performing Assets (NPAs) of REC are one of the lowest in the industry and it pays consistent dividends to its shareholders. Fundamental Analysis of REC analysis is required to understand the risk & return characteristics of the company and its suitability before investing. Do write your thoughts in the comment section below.
Written by Ashish Agarwal
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