Should we Hold Rural Electrification Shares after 10% Price Fall?

Dear Friend!

Rural Electrification Corporation (REC) Ltd. is a wonderful company.

I too own 564 shares as on date at an average holding cost of Rs.125.07.

Last week, while I was on vacation in Goa, I received two sms alerts informing me that the scrip has corrected by 5.58 and 5.08%, respectively.

Many people might have been spooked by such alerts, but not value investors. I did not panic at all, for I kew very well that REC is a wonderful company and nothing could go fundamentally wrong with it so suddenly.

After returning from the holiday I investigated the cause for the steep and sudden fall.

I was relieved to fund out that the cause for the market panic was a fairly large provision for contingency of Rs.616.19 crores (most likely towards bad debts) and consequent dip in the quarterly profit after tax to the extent of 24.80% compared to the previous quarter.

Tighter regulations and close monitoring of ‘Non Performing Assets (NPAs)’ from the last couple of years is forcing all financial institutions to come clean on their NPAs. Banks especially public sector banks have been making huge provisions for many quarters in the past. REC and PFC also have been making such provisions, though to a lesser extent.

Please see the following table for the provisions made in the last three quarters:

You can see for yourself that though fairly large, this provision is certainly not alarming, nor is the dip in the profits. REC continues to maintain very strong PBT and PAT margins of over 32% and 22% respectively.

In conclusion let me reiterate that the fundamentals of REC are intact, that there is no need to panic, please do hold the shares you already have and continue to buy as the scrip is available at discounted prices with a price to earnings (PE) ratio of 6.02 and a price to book value ratio of 0.65.

Thank you,

With Best Regards,

Anand

Why PFC and REC Shares Are Hammered on the Indian Bourses?

A very thought provoking question indeed. Thank you for raising it. Thank you. The answer as I see it is as follows:

People to tend to categorise and group companies into a category and give all the constituents of the group the same treatment irrespective of their individual merit. Banks and financial institutions fall under one category. Banks have accumulated a large amount of bad loans or ‘Non Performing Assets (NPAs). The Reserve Bank of India (RBI), under the previous governor, had ordered banks to wash their books and make adequate provision for losses arising from NPAs. As a result most of the banks have been declaring losses after making ample provisions against NPAs in the last few quarters and as a consequence their share prices have seen steep declines.

Banks Afflicted With NPAs

REC and PFC also have been making some provisions fir NPAs but to a very small extent. Their margins are also attractive. However the market is showing them the same treatment along with banks and has battered their stocks.

I also noticed that recently (last week) they had shown smart recovery showing 4–6% price increase in a single day.

Finally I totally agree with you. REC and PFC are showing consistently showing good results and have been unjustly battered along with bank stocks. Therefore, this is a good opportunity to buy these two stocks at low prices.

Thank you,

With Best Regards

Anand