Sunday, November 20, 2016

Rural Electrification Corporation Investment Report


Rural Electrification Corporation Ltd.
Value Investment Analysis Report
20th November 2016


Picture Presents a Snapshot of Rural Electrification Stock Market Data
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' 2012
March 31' 2013
March 31' 2014
March 31' 2015
March 31' 2016
Net sales
 10,337.59
 13,518.86
 17,017.98
 20,229.53
24012.88
 % age rise (+) or fall (-)
25.20%
30.77%
25.88%
18.87%
18.70%
Cost of sales:



Interest, Finance & Other Charges
 6,378.80
 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
170.97
151.84
129.91
133.94
143.19
Foreign currency fluctuations
52.55
77.51


Provision for Bad & Doubtful Debts
52.27
25.00
47.32
0.00

Other expenses
58.35
64.69
105.47
172.74
441.49
Prior Period Items (Net)



Depreciation
3.27
3.75
4.21
6.76
19.67
Total cost of sales
 6,716.21
 8,434.72
 10,590.07
 12,961.01
15982.88
Operating profit after interest
 3,621.38
 5,084.14
 6,427.91
 7,268.52
8030.00
Other Income
171.48
79.81
103.21
158.52
116.66
Profit Before Tax
3792.86
5163.95
6531.12
7427.04
8146.66
Provision for taxes
 975.83
1346.33
1847.42
2167.17
2455.24
Profit After Tax (PAT)
2817.03
3817.62
4683.70
5259.87
5691.42
EBDITA (Operating Profits)
3624.65
5087.89
6432.12
7275.28
8049.67
EBDITA (Operating Profits) %
35.06%
37.64%
37.80%
35.96%
33.52%
Depreciation
 3.27
 3.75
 4.21
 6.76
19.67
EBT
3621.38
5084.14
6427.91
7268.52
8030.00
EBT %
35.03%
37.61%
37.77%
35.93%
33.44%
Net Non-Operating Income
171.48
79.81
103.21
158.52
116.66
FINAL PBT
3792.86
5163.95
6531.12
7427.04
8146.66
FINAL PBT %
36.69%
38.20%
38.38%
36.71%
33.93%
Income Tax
975.83
1346.33
1847.42
2167.17
2455.24
PAT
2817.03
3817.62
4683.70
5259.87
5691.42
PAT %
27.25%
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.
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' 2012
March 31' 2013
March 31' 2014
 March 31' 2015
March 31' 2015
Liabilities:





Short-Term Borrowings
 2,500.00
 2,480.00
 2,540.00
734.00
6460.77
Short Term Provisions
339.65
227.43
257.96
453.71
858.42
Other Current Liabilities
14502.37
19116.40
18583.73
24811.40
30595.39
Total Current Liabilities
 17,342.02
 21,823.83
 21,381.69
 25,999.11
37,914.58
Term Liabilities



Long Term Borrowings-Secured
 76,553.68
 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
61.78
188.45
442.24
1007.09
1295.46
Other Term Liabilities
26.19
80.25
23.52
36.16
10.09
Total Term Liabilities
 76,641.65
 91,229.08
 1,10,801.75
 1,32,318.89
1,40,136.94
Total Outside Liabilities
 93,983.67
 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
987.46
Reserves & Surplus
13757.46
16466.92
19682.00
23869.57
27905.94
Net Worth
 14,744.92
 17,454.38
 20,669.46
 24,857.03
28,893.40






Total Liabilities
1,08,728.59
 1,30,507.29
 1,52,852.90
 1,83,175.03
2,06,944.92
Assets:





Cash And Bank Balances
5311.48
1484.26
1192.94
522.90
1864.08
Short term Investments
47.16
47.16
47.16
438.66
149.41

Other Current Assets
 12,155.88
 13,567.57
 13,939.25
 16,666.43
44491.08
Total Current Assets
 17,514.52
 15,098.99
 15,179.35
 17,627.99
46,504.57
Fixed Assets:



Net Block
68.24
67.59
69.67
72.50
253.05
Capital Work In Progress
7.92
8.75
9.71
7.39
76.84
Total
76.16
76.34
79.38
79.89
329.89
Non Current Investments
 710.43
 613.45
 1,660.63
 1,174.81
2202.14
Long Term Loans
89985.31
114574.53
135898.97
164213.78
157796.82
Deferred Tax Assets
10.05
9.51


Other Non Current Assets
429.8
130.76
32.12
77.13
109.26
Total Non-Current Assets
 91,135.59
 1,15,328.25
 1,37,591.72
 1,65,465.72
1,60,108.22
Intangible Assets
2.32
3.71
2.45
1.43
2.24
Total Assets
1,08,728.59
 1,30,507.29
 1,52,852.90
 1,83,175.03
2,06,944.92
Tangible Net Worth
 14,742.60
 17,450.67
 20,667.01
 24,855.60
 28,891.16
Net Working Capital
 172.50
 (6,724.84)
 (6,202.34)
 (8,371.12)
 8,589.99
Current Ratio
 1.01
 0.69
 0.71
 0.68
 1.23
Total Outside Liabilities/ Tangible Net Worth
 6.37
 6.48
 6.40
 6.37
 6.16
Total Term Liabilities/Tangible Net Worth
5.20
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 movements of REC Share in the last five years
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):

Picture shows price rise in Rural Electrification Corporation Share in the last five years
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 18th 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.