Tuesday, March 5, 2013

Switching on the next big power play!

REC has been posting growth in numbers at an impressive clip. Certain challenges threaten this growth in the long run. Virat Bahri of B&E analyses the company’s strategy to face the same.

Even a few minutes without electricity supply in our urban environment can make us cringe. In fact that makes the term electri‘city’ all the more apt! Imagine the plight of millions who go on with their lives without this precious resource. Power for all by 2012 is a cornerstone of the vision of the Indian government, which it has been trying to achieve under all circumstances. It presents myriad technological, managerial and logistical challenges and a mammoth financial challenge as well. That is where Rural Electrification Corporation of India (REC) comes in, as the nodal agency of the Indian government to fund power projects in rural areas.

Under the Rajeev Gandhi Grameen Vidyutikaran Yojana, funds used in completed projects and projects under implementation for rural electrification amounted to Rs.570 billion as on September 15. And REC is moving every inch possible to leverage the potential. The company has been growing income from operations at a CAGR of 18.8% since 2000-01 to reach Rs.67.07 billion for 2009-10. Net profit has grown even faster at a CAGR of 21.8% in the same period to reach Rs20.01 billion in FY 2009-10. REC Chairman J. M. Phatak tells B&E in an exclusive interview, “Since the base in rural India is much lower than urban India, their demand (for electricity) grows at around 8%, slightly higher than the national average. Our business therefore has to grow at least that rate plus inflation if any.” Typically, he expects business to continue to grow by 15% plus yoy. Loans of Rs.271.27 billion were disbursed during the year, and recovery was to the tune of Rs.124.96 billion.

Being an NBFC with the primary motive of social welfare, one of the key challenges for REC has been to control the default rate on loans. Being restricted to the power sector does have its drawbacks, as it is well known how power projects in India have been famously infamous for missing deadlines by miles. As Phatak tells us, the company comes in when most of the delays are accounted for, particularly with respect to environmental clearance and securing of coal linkages. But borrowers here are generally State Electricity Boards (primarily for transmission and distribution) with an inherently weak credit profile. Over time, the company has been able to mitigate this problem. Since 2005-06, the company’s loan sanctions have tripled to around Rs.450 billion but NPAs have come down drastically from around Rs.3 billion then to around Rs.195.4 million, around 0.03% of gross total assets. A CARE analyst tells B&E, “The risks (from the weak credit profile of SEBs) stand mitigated due to robust credit appraisal procedures and monitoring. Also, a majority of these loan assets are backed by respective state government guarantees and escrow mechanism for recovery.” Moreover, REC is an important source of funding from tax free bonds and loans from multilateral institutions backed by the government of India; and borrowers do not want to risk losing this source. That is why REC’s credit rating relies heavily on the government’s ratings. On June 14 this year, Fitch Ratings revised REC’s Long-term local currency Issuer Default Rating (LC IDR) to Stable from Negative after it changed India’s sovereign LC IDR rating to Stable from Negative on the same day. Another option they are now considering is equity stake in upcoming projects, which they can cash out of at an opportune time.


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

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