REC: NPA Worry Provides Opportunity

DateTipwala RecoTime FrameCMPTargetSell Decision
4Oct2014Buy REC3 MonthsRs. 249Rs. 290 – 310Time frame or Target

Rural Electrification Corporation (REC) has corrected 35% from its recent high of Rs. 381 per share on fears of asset quality stress post the Supreme Court verdict on coal block de-allocation. Also, there is some apprehension on increasing competition from banks on account of SLR / CRR exemption that their infrastructure bonds would enjoy.

Our view is that the most of the projects impacted by the coal block de-allocation may not turn into NPAs as their debt-servicing capabilities will remain intact even if they have to buy expensive coal through e-auctions. Secondly, we expect quick action from the government in re-auctioning the cancelled blocks and kick-starting the stalled projects in the power space. Thirdly, valuations at 0.8x FY16e book value are attractive and provide a good entry point.

We recommend accumulating REC at Rs. 250 from a three months perspective.

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