Fundamental analysis of REC – financials, future plans, etc.

REC Basic Analysis: The Indian government is pursuing a goal of achieving 500GW of renewable energy capacity by 2030, which is expected to result in significant investment in this field. In this article, we will analyze one company in particular that is involved in financing this sector.

REC Basic Analysis

Company Overview

Established in 1969, REC Limited is registered with RBI as a Non-Banking Finance Company (NBFC), Public Finance Institution (PFI) and Infrastructure Finance Company to provide energy to agricultural pump sets for irrigation purposes to reduce agricultural dependence on monsoon. there is. (IFC).

RECs provide long-term loans and other financial products to states, central and private enterprises to create infrastructure assets for the country. It finances power sector infrastructure, renewable energy and new technologies, and the infrastructure and logistics sector (non-power). We operate nationwide through 22 state offices.

The company also played an important role in government projects in the power sector and was associated with many government schemes.

segment analysis

The company operates in only one business segment: lending to the power, logistics and infrastructure sectors. Segment revenue based on the main products or services provided;

Industry Overview

India has emerged as a significant force in the global energy economy. Post-pandemic economic recovery and adverse weather conditions have led to an 8.4% increase in electricity demand in India. India’s diverse business environment and large consumer base are driving the country’s rapid economic growth. With strong macroeconomic fundamentals and wise fiscal policies, India ranks fifth in the world in GDP, with a target of $5 trillion by 2025. The economic survey predicts growth of 6.5% in 2023-24.

Meanwhile, ongoing economic development, reforms and supportive policies are advancing India’s power sector. The 9.5% increase in energy demand in 2022-23 shows its intensity. India aims to achieve further growth and long-term sustainability by focusing on renewable energy and replacing 50% of existing capacity with non-fossil fuel-based energy sources by 2030. The Indian government is also pursuing several reforms to strengthen the distribution sector.

As the Indian economy is growing rapidly with population growth and current low per capita electricity consumption, future prospects for power sector investments are quite bright in the long term.

REC – Finance

Let’s take a look at the company’s financial condition..

Sales and Net Profit

The company’s financial statements show an increase in revenue of 0.5% from FY22 to FY23 from ₹39269 Crores to ₹39478 Crores respectively. On a 4-year CAGR, the company has grown at 11.66%. Sales are continuously increasing, and as of March 31, REC’s loan portfolio was classified as 39% in power generation business, 11% in transmission business, 37% in distribution business, 7% in new and renewable energy business, and 6% in STL/RBPF. 2023.

The company’s net profit increased by 11% from ₹10036 Crores in FY22 to ₹11167 Crores in FY23. On a 4-year CAGR, the company has grown by 18.10%, indicating good growth.

profit

REC reported a 7.6% increase in operating profit margin (OPM) and a 2.73% increase in net profit margin (NPM) from FY22 to FY23. Although profit margins fell, they exceeded the five-year averages of 15.45% and 7.52%, respectively.

REC has consistently raised funds at competitive interest rates, which is the basis for the profitability of its financial business. The overall weighted average annual cost of funds on outstanding borrowings as of March 31, 2023 was 7.28%. This is because it has been rated “AAA” for domestic debt instruments and international ratings by CRISIL, CARE, India Ratings & Research and ICRA. It has been rated “Baa3” and “BBB-” by Moody’s and FITCH, respectively.

The difference between OPM and NPM is that they are NBFCs, with very low operating costs and high financing costs.

rate of return

Return on capital employed increased by 0.04% from 9.1% in FY22 to 9.14% in FY23, but considering the five-year trend, RoCE remained at the same level. The five-year average ROCE is 9.08%.

Return on equity reported a decline of 0.74% from 21.36% in FY22 to 20.62% in FY23. Considering the long-term perspective, RoE increased by 3.5%. The 5-year average RoE is 18.91%.

RoCE is lower compared to RoE. This is because the company’s debt is greater than its equity value, which increases the denominator of the ratio.

leverage ratio

FY23 debt-to-equity ratio is 6.55x. In the long term, the ratio has decreased by 0.52. Due to high debt, the interest convergence ratio was low but is increasing.

Since RECs are NBFCs, the company has to borrow money to provide loans and advances, so high debt to equity is not a warning sign.

Breakdown of Sanctions and Expenditures by Sector in FY23

main borrower

key indicators

Rural Electrification Corporation – Future Plans

• REC has approved over Rs 85,700 crore for various projects ranging from metro, ports, airports, refineries, highways and steel infrastructure to healthcare, educational institutions and IT infrastructure/fiber optic sectors. This equates to approximately 32%. This is the overall sanctions.
• REC currently aims to increase its green project loan portfolio by more than 10 times to ₹3 lakh crore by 2030.
• We aim to achieve a loan volume of over 10 million rupees by March 2030.
• Net zero NPAs by 2025.

conclusion

We conclude our article on REC Limited’s fundamental analysis, looking at its business, industry, finances, and future prospects. The company appears optimistic and has higher growth opportunities. REC’s non-performing assets (NPAs) are among the lowest in the industry and it pays consistent dividends to its shareholders. Basic analysis of REC analysis is necessary to understand the risk and return characteristics and suitability of a company before investment. Please share your thoughts in the comments section below.

Written by Ashish Agarwal

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