Unearthing the Ascent of REC Limited: A Comprehensive Analysis

Key Takeaways:

1. Rural Electrification Corporation Limited reported a 163% growth in the last seven months.
2. The company provides long-term loans to power generation, transmission, and distribution companies with significant portfolios in state-owned entities.
3. Changes in business model/environment such as late payment surcharge rules by Ministry of Power and diversification to non-power infrastructure sector led to significant growth numbers.

Introduction

The Rural Electrification Corporation Limited (REC), in the Government of India, saw a spectacular 163% ascension in stock value over the last seven months. In this post, the origins of this surge, the loan portfolio, changes in the business model or environment, and where REC is heading in the future will be explored.

Summarizing REC’s Prominent Run

REC's surge in the stock market can be summarized into two main sections: understanding the history and evaluating the loan portfolio.

Understanding the History

Formed in 1969, REC rectified inadequate access to electricity in rural and remote regions of India by financing and promoting rural electrification initiatives. It operates as an entity under the Ministry of Power and grants long-term loans to state, central, and private companies for building infrastructure assets across the nation. Over time, it has expanded to finance renewable energy resources such as solar, wind, and green hydrogen.

Investigating REC's Loan Portfolio

REC has primarily raised its capital through corporate bonds, loans from banks, and borrowing in foreign currency. Of the total loans disbursed, approximately 91% is allocated to state-related entities, with private sector entities only constituting about 9%. Around 30% is disbursed to the power generation sector, followed by distribution and late payment surcharges or liquidity infusion schemes. Interestingly, the top ten borrowers, predominantly government entities, account for 40% of the loan book.

Navigating Through the NPA Status

The Gross Non-Performing Assets (NPAs) and the net NPAs have been witnessing a downward trend, indicating an improvement in the asset quality. Provision coverage ratio has also increased, indicating better protection against potential bad debts. As of the current situation, no new NPAs emerged over the last six quarters, and out of the 36 stressed assets, 17 have been resolved.

Changes in Business Model and Environment

There have been significant shifts in the business environment and model for REC, primarily in three areas:

1. The introduction of the Late Payment Surcharge Rules: Appointed as a nodal agency, REC provides finance to distribution firms so they can promptly cover their dues, thereby ensuring repayment to generation companies. These loans are secured by state government guarantees, thereby bolstering the firm's top-line growth.

2. Diversifying Portfolio: REC is now lending to non-power infrastructure sectors, intending to lend approximately 30% of their book to such sectors. This will allow them to diversify their portfolio and potentially augment their revenue.

3. Hedging of Foreign Borrowings: The hedging of their foreign borrowing has elevated to 91%, shielding the firm against volatile foreign currency fluctuations.

Growth Ahead

The future seems to be promising with REC planning on a 12% growth in their loan book and an aim to boost their loan book to 10 trillion INR by 2030.

In conclusion, the extraordinary performance of REC's stocks has been a product of favorable financials, timely regulatory measures, strategic business decisions, and strong government backing.