Sunday, July 3, 2011

REC Buy on declines



CMP Rs 204

REC is another company that has managed a stellar performance during the past three years. It has shown decent growth in the Q4 as well. For example, its disbursements during Q4 grew by 39%, helping it to register a loan book growth of 24%. Analysts say that it could restrict the margin fall to 22 basis points (QoQ) due to the reliance of incremental borrowings for the quarter through external commercial borrowing (ECB). REC has already applied to the RBI to raise $750 million through ECB and plans to raise a total of $1.2 billion during 2010-11.

To protect its margins further, REC has also increased its prime lending rate (PLR) by 100 basis points in the recent past. However, the company has witnessed a massive correction in the recent past (from Rs 414 in October 2010 to Rs 204 now, a fall of more than 50% in a short span of nine months) mostly due to a broader concern about the power sector.

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These concerns include the weakening state electricity board (SEB) finances, slower pace of power project allotment and implementation due to environmental problems, supply linkage issues and rising interest rates. With the correction taking the valuations to much lower levels, analysts feel that it is a very good long term bet, especially since it is able to protect its profitability.

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"REC's low operating and credit costs would sustain its profitability in the coming years," says Parag Jariwal, financial sector analyst at Anand Rathi Research. However, don't expect a smooth ride from tomorrow onwards on this counter and, therefore, investors will be better off if they buy into this counter gradually.

Our Recommendation :

It has given negative returns for those holding since last 1 year. The following information captures the returns from scrip

Time Span Price Change %Change
Today 198.05 2.25 1.14
Week 187.90 7.90 4.20
Month 213.60 -17.80 -8.33
Three Months 253.80 -58.00 -22.85
Six Months 298.20 -102.40 -34.33
One Year 302.80 -107.00 -35.33


REC will give good returns if investors can buy on declines. It has a long term target of Rs.400 for a 12-18 months holding period.

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