Wednesday, May 31, 2017

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

REC Company Logo

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:

Table showing profits and profitability of REC for last 3 quarteres

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,