Rural Electrification Corporation Investment Report

Rural Electrification Corporation Ltd.

Value Investment Analysis Report

20^th November 2016

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Snapshot of Rural Electrification Corporation Share Data on Stock Markets

Critical prima-facie Observations:

1.     PE Ratio: Rural Electrification Corporation (REC)’s PE Ratio is 2.29 is very attractively below the ideal 10.

2.     Price to Book Value Ratio: Very attractively placed at one third the maximum recommended 1.50 times the book value at 0.45.

3.     Distance from 52 week low: On this parameter the scrip is NOT in the attractive zone – it is very near the 52 Week High.

4.     Dividend Yield: Again very attractively at 12.86% compared to the recommended minimum four to five percent and above.

In light of the above highly favourable conditions, Rural Electrification Corporation (REC) shall definitely be accepted for further study.

A. Company Performance

Profitability Analysis

REC Profit and Loss Account (Rs. in Crores)	March 31' 2013	March 31' 2014	March 31' 2015	March 31' 2016
Net sales	13,518.86	17,017.98	20,229.53	24012.88
% age rise (+) or fall (-)	30.77%	25.88%	18.87%	18.70%
Cost of sales:
Interest, Finance & Other Charges	8,006.25	10,038.46	11,844.61	14282.35
Bonds Issue Expenses
Provision for Contingency	105.68	264.70	802.96	1096.18
Personnel Expenses	151.84	129.91	133.94	143.19
Foreign currency fluctuations	77.51
Provision for Bad & Doubtful Debts	25.00	47.32	0.00
Other expenses	64.69	105.47	172.74	441.49
Prior Period Items (Net)
Depreciation	3.75	4.21	6.76	19.67
Total cost of sales	8,434.72	10,590.07	12,961.01	15982.88
Operating profit after interest	5,084.14	6,427.91	7,268.52	8030.00
Other Income	79.81	103.21	158.52	116.66
Profit Before Tax	5163.95	6531.12	7427.04	8146.66
Provision for taxes	1346.33	1847.42	2167.17	2455.24
Profit After Tax (PAT)	3817.62	4683.70	5259.87	5691.42
EBDITA (Operating Profits)	5087.89	6432.12	7275.28	8049.67
EBDITA (Operating Profits) %	37.64%	37.80%	35.96%	33.52%
Depreciation	3.75	4.21	6.76	19.67
EBT	5084.14	6427.91	7268.52	8030.00
EBT %	37.61%	37.77%	35.93%	33.44%
Net Non-Operating Income	79.81	103.21	158.52	116.66
FINAL PBT	5163.95	6531.12	7427.04	8146.66
FINAL PBT %	38.20%	38.38%	36.71%	33.93%
Income Tax	1346.33	1847.42	2167.17	2455.24
PAT	3817.62	4683.70	5259.87	5691.42
PAT %	28.24%	27.52%	26.00%	23.70%

Remarks:

1. EBDITA margins are Excellent.
2. The company has been in consistent profits since 1990-91 except for the year 1992-93. This is record of 25 years out of last 26 years.
3. Under the profitability parameter, consistently good margins urge strong recommendation for inclusion.

Balance Sheet Analysis:

REC Profit and Loss Account (Rs. in Crores)	March 31' 2013	March 31' 2014	March 31' 2015	March 31' 2016
Liabilities:
Short-Term Borrowings	2,480.00	2,540.00	734.00	6460.77
Short Term Provisions	227.43	257.96	453.71	858.42
Other Current Liabilities	19116.40	18583.73	24811.40	30595.39
Total Current Liabilities	21,823.83	21,381.69	25,999.11	37,914.58
Term Liabilities
Long Term Borrowings-Secured	90,960.38	1,10,162.30	1,31,168.32	138783.85
Deferred Tax Liability		173.69	107.32	47.54
Long Term Provisions	188.45	442.24	1007.09	1295.46
Other Term Liabilities	80.25	23.52	36.16	10.09
Total Term Liabilities	91,229.08	1,10,801.75	1,32,318.89	1,40,136.94
Total Outside Liabilities	1,13,052.91	1,32,183.44	1,58,318.00	1,78,051.52
Net Worth:
Ordinary Share Capital	987.46	987.46	987.46	987.46
Reserves & Surplus	16466.92	19682.00	23869.57	27905.94
Net Worth	17,454.38	20,669.46	24,857.03	28,893.40
Total Liabilities	1,30,507.29	1,52,852.90	1,83,175.03	2,06,944.92
Assets:
Cash And Bank Balances	1484.26	1192.94	522.90	1864.08
Short term Investments	47.16	47.16	438.66	149.41
Other Current Assets	13,567.57	13,939.25	16,666.43	44491.08
Total Current Assets	15,098.99	15,179.35	17,627.99	46,504.57
Fixed Assets:
Net Block	67.59	69.67	72.50	253.05
Capital Work In Progress	8.75	9.71	7.39	76.84
Total	76.34	79.38	79.89	329.89
Non Current Investments	613.45	1,660.63	1,174.81	2202.14
Long Term Loans	114574.53	135898.97	164213.78	157796.82
Deferred Tax Assets	9.51
Other Non Current Assets	130.76	32.12	77.13	109.26
Total Non-Current Assets	1,15,328.25	1,37,591.72	1,65,465.72	1,60,108.22
Intangible Assets	3.71	2.45	1.43	2.24
Total Assets	1,30,507.29	1,52,852.90	1,83,175.03	2,06,944.92
Tangible Net Worth	17,450.67	20,667.01	24,855.60	28,891.16
Net Working Capital	(6,724.84)	(6,202.34)	(8,371.12)	8,589.99
Current Ratio	0.69	0.71	0.68	1.23
Total Outside Liabilities/ Tangible Net Worth	6.48	6.40	6.37	6.16
Total Term Liabilities/Tangible Net Worth	5.23	5.36	5.32	4.85

Highlights:

Many liquidity and solvency ratios appear poor. But these ratios cannot be applied just mechanically to a term lending institution like Rural Electrification Corporation, which meets payment obligations from recoveries of loans.

Therefore there are no negatives as far as balance sheet analysis is concerned and REC can be included.

Dividends

Distribution of net Profits

Let us study the dividend distribution pattern of REC:

	March 31' 2012	March 31' 2013	March 31' 2014	March 31' 2015	March 31' 2016
Profit After Tax	2817.03	3817.62	4683.70	5259.87	5691.42
Dividend	1784.12	2775.30	3370.01	1270.79	2034.26
Dividend as % of PAT	63.33%	72.70%	71.95%	24.16%	35.74%

The above table shows that the company has been generously distributing about 25-35% of the net profits as dividends. On this count the company performance very good.

Uninterrupted Dividend Payment History

Announcement Date	Effective Date	Dividend Type	Dividend(%of Face/ Nominal Value of Share)
27/05/2016	22/08/2016	Final	51%
05/02/2016	17/02/2016	Interim	120%
28/05/2015	09/09/2015	Final	27%
10/02/2015	18/02/2015	Interim	80%
26/05/2014	02/09/2014	Final	17.5%
30/01/2014	20/02/2014	Interim	77.5%
28/05/2013	28/08/2013	Final	15%
23/01/2013	08/02/2013	Interim	67.5%
23/05/2012	04/09/2012	Final	25%
16/01/2012	30/01/2012	Interim	50%
24/05/2011	30/08/2011	Final	40%
28/01/2011	11/02/2011	Interim	35%
19/05/2010	24/08/2010	Final	35%
17/12/2009	04/01/2010	Interim	30%
25/05/2009	03/09/2009	Final	25%
04/02/2009	26/02/2009	Interim	20%
28/05/2008	08/09/2008	Final	30%
FY 2006-07			23%

Besides the above table, which shows uninterrupted dividend payment for the last 10 years, the company’s old annual reports indicate that another nine years, that is since 1997-98 the company had maintained dividends. This makes it a total uninterrupted dividend payment track record of 19 years.

It is also seen that from old annual reports that REC did not pay dividends for five years from FY 1992-93 to 1996-1997. In the year 1992-93 the company incurred a loss.

On the dividends front Rural Electrification Corporation has impeccable credentials.

Dividend Yield:

Dividend Yield, is a combination of both the company’s dividend policy and performance as well as market condition. On this count a yield is very attractive at 12.86% compared to the minimum recommended 4-5%.

This shows that not only the company is handsomely distributing dividends but also that the price of the share is not unreasonably high to pull down the yield.

Five-year price graph:

Graph shows the price movement of Rural Electrification Corporation Share for five years

The graph above shows that the stock price of REC having dipped to about Rs.75 in June 2016 (on the back of severe hammering inflicted by the market on banking finance stock for high levels of Non Performing Assets (NPAs), has recovered steeply and is not in any specially favourable condition.

Five years returns (price rise):

Table shows return through price rise of REC Share in the last five year

Besides the price graph, the five years return of +48.79% indicates that the price of the scrip has appreciated that much in the past five years and therefore there is no special advantageous condition here.

Distance from 52 Week Low:

52 Week Low: Rs.76.12

52 Week High: Rs.140.90

Current Market Price (CMP) on 18^th November 2016: Rs.132.50

Distance from 52 Week Low is 74% which is not favorable. In fact it indicates that it is just 26% less than its 52 Week High. This means that the CMP is very near the highest price of the scrip in the last one year.

However please note that there is still opportunity for price increase from the present level of Rs.130 as we ourselves have bought this share at Rs.200 levels.

Final Conclusions:

1. The above brief analysis proves that Rural Electrification Corporation is without doubt a wonderful company and brand.
2. PE Ratio of 2.29  is very low and the company’s earnings will recover the investment in just 2.29 years.
3. Price to Book Value Ratio (P2BV) of just 0.45 means we are able to buy the net assets of this wonderful company at whopping 55% discount!
4. The EBDITA, EBT and PAT margins are very good.
5. The company is consistently profitable for many years into the past.
6. There are no adverse observations from the balance sheet angle.
7. Even though the market condition parameters of five year price graph and distance from 52 Week low and five year returns do not bestow any special privilege, the market of the scrip is reasonable as shown by low PE and P2BV ratios.

Final Investment Advice:

Rural Electrification Corporation (REC) is a wonderful company that will lend grandeur to any value investing portfolio and a must include at the current price levels.

Post Disclaimer: Opinions expressed here are the author’s personal opinions. Market conditions have a great bearing on many end results discussed in this report. No disrespect is intended towards the company, it’s management. Investors are advised not rely blindly on the opinions expressed herein but to exercise their own judgment. Neither the author nor the blog shall be responsible for any loss suffered by either acting or not acting based on the opinions expressed herein.

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