ICICIdirect issued Buy call on Rural Electrification Corporation (REC). The stock broker recommends buying stock for target of Rs 405 against current market price of Rs 270 in its report.
Commenting on investment rationale, the stock broker said,"REC is one of the two largest public sector pure-play power asset finance companies. Present across the value chain, its exposure is almost evenly split between generation and transmission-distribution. Only 15.5% of its loans are to private players. Recent regulatory changes provide additional incentives to banks to participate in the sector and spreads are likely to contract. With restructuring provisioning norms becoming applicable by Mar. 31, 2015, credit costs are likely to remain elevated - although our asset quality scenario analysis rules out risks of major earnings disruption."
"Cash flow and accrual analytics put at bay any fears of a severe crunch in operating cash flow from borrowers. Dividends appear sustainable in the face of adverse business outcome. Modifying RoEs, to adjust for earlier low provisioning, trims them by 90-210bps and shows up sustainable ‘real’ RoE at ~20% going forward. Our target multiple is 1.2x P/BVPS (on Sep-2016), factoring in tail risks on government generation asset restructuring provisioning, yielding a target price of Rs 405," it added.
