BEST BUY- RURAL ELECTRIC CORPORATION (REC)

Following the rumors that media has spread about REC, its Finance
Director HD Khunteta have cleared up Tamil Nadu issue's rumors in the
following interview to CNBC.
Tamil Nadu electricity board is a Government entity and the Government
will take the responsibility to pay REC the due amount if the board
fails. In no ways will the Tamil Nadu board be defaulted by REC. REC
is receiving regular interest on due date by the board. Please read
the following interview of HD Khunteta ,taken by CNBC on 20th June,
2011.
Q: Your investors are understandably worried about the Rs 11,000 crore
exposure that you have to the Tamil Nadu power utility, how do you see
things panning out there, given their call for restructuring?
A: Out of the Rs 11,000 crore of loan, Rs 3000 crore to the joint
venture where turnover is, and NTPC have the joint venture and
projects are under construction, so the projects are likely to come
after two years and interest in the part of that overall purchase
growth so I don't think there is any worry. Tamil Nadu board's
outstanding amount stands around Rs 8000 crore and it is a part of the
government department.
So, I feel that the state utility cannot afford to default. In case
they default to the NTPC, REC or PFC , then either they can get some
money since power cannot be purchased from the NTPC. So I am hopeful
that their financial position is not good since last 5-6 years also.
And they are making underperson payment on the due date. So I am
hopeful that such recession will not arise.
Q: Is it accurate though that the Tamil Nadu exposure is 14% of your
outstanding loans and have you at this point made any provisioning at
all for these loans?
A: No provisioning has been made, because they have not defaulted and
the amount due is from the electricity board which is the part of the
government under the provisions of the 2003 act. If any subsidy is
been given on the advice of the state government, then they have to
make the payment in cash.
Moreover, in case any short fall in the revenue and the company chart
has to be financed by the government department, then I am hopeful
that the state government will make the payment of the subsidy and
certain parts of that. Meanwhile, some portion will come through the
increase in the tariff. So situation of a default may not arise and so
far they have not defaulted on any of the loans.
Q: While defaults may not happen, but the fear is of some kind of
restructuring in which case interest rates might be brought down, etc.
Do you think that is a possibility and if that happens how much you
would stand to lose?
A: I don't think that the interest rates may be restructured. The
maximum possibility may be the tenure from 10 year may increase to 13
years from 14 years. But the deduction in interest rates is not
possibility because we have borrowed the money from the market and the
interest is being charged based on the market rates.
So, element of any additional profit or the money has been taken from
the government at a subsidised rate and we are charging the high rate
of interest, so that is not the case as far as the loan given to the
Tamil Nadu electricity is concerned. So I don't think that there may
be any impact on account of interest.
Q: Is it possible though since the Tamil Nadu Electricity Board is
quite stressed for capital that they ask for and get some kind of
moratorium for a period of time which would also be negative for you?
A: So far they have not requested. And they are making the payments on
due date. So no request has been received by REC. So, it is a
hypothetical question and most likely suspicion should not arise and
government will honor their commitments.

So,we believe the recent fall in stock is a good opportunity point as
long term drivers are intact.
We recommend 'BUY' on the stock at CMP 183 with a target price of Rs.
300..

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accuracy, adequacy or completeness of any information and is not
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from the use of such information. The directors of Smart Profit may
hold a position in the recommended script.

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