Strong asset quality and loan growth for REC, PFC

Cheap valuations make scrips preferred bets of most analysts

Robust asset quality, loan growth and double-digit net profit growth were the key highlights of Rural Electrification Corporation (REC) and Power Finance Corporation (PFC)'s results for the September quarter. Strong loan growth, along with lower provisions (due to high provisions in the base quarter) boosted REC's net interest income (NII) and net profit. While NII grew 23.3 per cent year-on-year (y-o-y) to Rs 2,032 crore, net profit growth came in higher at 35.1 per cent y-o-y to Rs 1,501 crore. Given that REC had two non-performing assets (NPAs) a year ago, that quarter's provisions had elevated to Rs 340 crore. In the absence of NPAs, the provisions were nearly wiped out, and contracted 94.7 per cent to Rs 18 crore. Consequently, the net profit came in 13.8 per cent higher than consensus Bloomberg expectations of Rs 1,319 crore.

PFC, too, witnessed strong traction in NII which grew 18 per cent to Rs 2,492 crore. However, provisions grew twofolds on a y-o-y basis, pulling down its net profit growth in the quarter to 10.7 per cent at Rs 1,409 crore. The firm plans to provide another Rs 215 crore over two quarters towards restructured private sector loans.

The divergence in provisions is due to the two firms' different accounting policies on making provisions towards restructured assets. While REC is also slated to make these provisions starting the March 2015 quarter, analysts expect these to be marginal. Antique Stock Broking's Digant Haria says PFC's high provisions on restructured assets is in line with its accounting policy. For REC, provisions on restructured assets could be nominal at Rs 200 crore and thus not have any meaningful impact on its profits.

Both stocks moved in tandem on the markets, falling five per cent each in early trade and recovering later on. While REC rallied and regained most losses, ending 0.2 per cent down at Rs 301, PFC remained weak, falling 2.6 per cent to Rs 275 a share. Both stocks have fallen 20 per cent each from their respective 52-week highs and are trading at attractive valuations of one time the FY16 estimated book value.

Both these lenders will also be key beneficiaries of the ongoing reforms in coal, gas sectors which will rub off favourably on their credit offtake as well as asset quality. Most analysts remain bullish on the prospects of the two financiers.