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REC Ltd Cards : Stock Analysis November 2023

REC Limited - Wikipedia

COMPANY NAME: REC Ltd

VITAL COMPANY RATIOS EXPLAINED FOR A LAYMAN:

  • High operating profit margin (OPM) of 101% shows company is very efficient in managing operating costs.
  • Low debt to equity ratio of 6.60 indicates company uses lower debt to finance its assets.
  • Good amount of cash equivalents at Rs 6,876 Cr provides liquidity cushion.
  • Promoter holding is high and constant at 52.63%
  • Nil pledged percentage by promoters instills confidence.
  • EPS of Rs 48.37 is strong.
  • Difference between CMP and Book value is decent. Stock can be considered undervalued.
  • Good dividend yield of 3.73%
  • CMP is below 50 DMA but above 200 DMA indicating positive long term trend.

Company Overview:

REC Ltd is a Public Sector Financial Institution (PSFI) incorporated in 1962 under the Ministry of Power, Government of India. The company’s primary objective is to provide financial assistance for the development of power projects in India. REC Ltd is a major player in the Indian power sector and has played a crucial role in financing the growth of the sector. The company has a strong track record of profitability and has consistently delivered healthy dividends to its shareholders.

IS THIS STOCK OVERVALUED OR UNDERVALUED?:

Stock seems to be undervalued based on vital ratios like OPM, debt-equity, promoter holding, dividend yield etc.

SHOULD WE BUY THIS STOCK AND WHY?: 

Yes, the stock can be considered for long term as company has healthy growth prospects. Being undervalued currently presents good buying opportunity.

SHOULD WE SELL THIS STOCK AND WHY?:

No evident reason found to sell this stock based on available information. Long term growth trend seems positive.

HOW IS THE INDUSTRY OF THIS COMPANY GROWING?: 

The power and infrastructure industry has good growth potential in India supported by government reforms and increased spending. REC being a leading player is well placed to benefit.

HOW THIS COMPANY IS GOING TO PERFORM LONG TERM:

Company is expected to perform well in the long run owing to its leadership position in power sector financing, high efficiency, strong financials and huge growth potential of power sector in India.

COMPANY OVERVIEW IN 200 WORDS FOR LAYMAN OR RETAIL INVESTORS:

REC Ltd is a leading public sector company providing financial assistance across power generation, transmission and distribution sectors. It offers loans for setting up new power projects, improving existing infrastructure and working capital needs of power utilities. With high 101% operating margins, low debt and strong government backing, company generates excellent profitability. The essential nature of power sector alongwith increased government reforms and spending makes long term growth prospects very strong. REC remains a proxy play on India’s power sector growth story. Backed by robust financial performance, sector leadership and undervaluation, the stock presents a good option for long term investors.

COMPANY DETAILS IS GIVEN BELOW:

Please refer to the detailed company information provided in the original document. It covers financials, ratios, peer comparison, shareholding pattern etc.

Working Capital Position:

  • Working capital days have increased over the years indicating some efficiency issues in managing short term liquidity. Needs monitoring.

Growth Prospects:

  • Sales growth over last 5 years is moderate at 11.8%. But power sector growth potential is immense in India.

Profitability:

  • Profit growth over last 5 years is strong at 20.2% CAGR. With operating leverage, net profits can expand faster.

Valuations:

  • P/E ratio of 6.94 indicates the stock is trading at a significant discount to industry average of 10.3. Valuations are attractive.

Financial Health:

  • High amount of debt is a concern for the company. But debt servicing ability indicated by interest coverage ratio needs to be monitored.

Shareholder Returns:

  • Company has maintained a healthy dividend payout of 29.9% historically. Good for income seeking investors.

VITAL COMPANY RATIOS EXPLAINED FOR A LAYMAN:

  • Debt to equity ratio: This ratio measures a company’s debt levels relative to its equity. A lower debt-to-equity ratio indicates that the company is less reliant on debt and is therefore less risky. REC Ltd’s debt-to-equity ratio is 6.60, which is considered to be on the higher side. However, the company’s strong profitability and cash flow generation suggest that it is able to manage its debt levels effectively.

  • Return on equity (ROE): This ratio measures a company’s profitability relative to its shareholders’ equity. A higher ROE indicates that the company is generating more profits from its shareholders’ investments. REC Ltd’s ROE is 20.4%, which is considered to be very good.

  • Interest coverage ratio: This ratio measures a company’s ability to meet its interest obligations. A higher interest coverage ratio indicates that the company is generating enough earnings to cover its interest expenses. REC Ltd’s interest coverage ratio is 1.98, which is considered to be low. However, the company’s strong cash flow generation suggests that it is able to manage its interest expenses effectively.

  • Dividend yield: This ratio measures the annual dividend payment per share as a percentage of the current market price of the stock. REC Ltd’s dividend yield is 3.73%, which is considered to be good.

IS THIS STOCK OVERVALUED OR UNDERVALUED?:

Based on the following factors, REC Ltd’s stock is considered to be undervalued:

  • Strong profitability: REC Ltd has a strong track record of profitability and has consistently delivered healthy dividends to its shareholders.
  • Low debt-to-equity ratio: REC Ltd’s debt-to-equity ratio is 6.60, which is considered to be on the higher side. However, the company’s strong profitability and cash flow generation suggest that it is able to manage its debt levels effectively.
  • High return on equity (ROE): REC Ltd’s ROE is 20.4%, which is considered to be very good.
  • High dividend yield: REC Ltd’s dividend yield is 3.73%, which is considered to be good.

SHOULD WE BUY THIS STOCK AND WHY?:

REC Ltd is a fundamentally strong company with a strong track record of profitability and a healthy dividend payout. The company is also well-positioned to benefit from the growth of the Indian power sector. Therefore, REC Ltd can be considered to be a good long-term investment.

SHOULD WE SELL THIS STOCK AND WHY?:

REC Ltd’s stock price is currently volatile due to the overall market conditions. Therefore, investors who are risk-averse may want to sell their shares in the short term. However, long-term investors are advised to hold their shares.

HOW IS THE INDUSTRY OF THIS COMPANY GROWING?:

The Indian power sector is expected to grow at a CAGR of 8% over the next five years. This growth will be driven by factors such as increasing electrification, rising disposable incomes, and the government’s focus on renewable energy. REC Ltd is well-positioned to benefit from this growth due to its strong track record in financing power projects.

HOW THIS COMPANY IS GOING TO PERFORM LONG TERM:

REC Ltd is expected to continue to perform well in the long term due to its strong fundamentals and favourable industry outlook. The company is expected to continue to grow its profitability and earnings, and it is also expected to continue to pay healthy dividends to its shareholders.

COMPANY OVERVIEW FOR LAYMAN OR RETAIL INVESTORS:

REC Ltd is a leading financial institution in India that provides financial assistance for the development of power projects. The company has a strong track record of profitability and a healthy dividend payout. REC Ltd is well-positioned to benefit from the growth of the Indian power sector, and it is expected to continue to perform well in the long term.

Disclaimer:

The analysis and opinions provided above are for educational and informational purposes only. They should not be construed as specific investment, accounting, legal or tax advice. Individual situations and current events may differ from case to case basis, so readers and viewers are advised to consider analysis that aligns with their portfolio risk, investment goals and unique situation before making any investment or financial decision.

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