Rural Electrification (REC) Share Price: Rs 6 Trillion Nuclear Power Push to Fuel its Next Leg of Growth

In a world facing a booming population and increasing technological reliance, the demand for electricity has surged. From charging our devices to powering homes and businesses, electricity is essential.

However, this demand brings a significant challenge: reducing carbon dioxide emissions.

India has made impressive strides in transitioning from coal-based power to renewable sources. While coal still plays a major role in the energy mix, the country ranks fourth globally in installed renewable energy capacity, including large hydro, wind, and solar power.

Though nuclear energy generation is currently low compared to other renewables, efforts are underway to boost its capacity and achieve a 50% energy mix from non-fossil fuels.

Nuclear power is a clean, round-the-clock source of electricity, with Indian plants generating over 833 billion (bn) units of clean energy and saving about 716 million (m) tons of carbon emissions, according to the Nuclear Power Corporation of India.

One company that has recently demonstrated interest in this sector is REC, which is also exploring opportunities in international transmission projects.

Before diving into REC's nuclear plans, let's briefly introduce the company here's a brief introduction of REC.

About REC

Rural Electrification Corporation (REC) is a Navratna Central Public Sector Enterprise under the Ministry of Power. It is also a subsidiary of PFC.

The company is engaged in the financing of power generation, transmission and distribution projects throughout India.

The company also forayed into the infrastructure and logistics sector and is funding metro, road and highways, port waterways and steel infra projects.

REC occupies a nodal position in the government's plans for the growth of the Indian power sector. This is particularly for developing the power infrastructure in rural areas.

The company was earlier administering grants and providing loans as the nodal agency for the Rajiv Gandhi Gramin Vidyutikaran Yojana (RGGVY), which was primarily aimed at the electrification of all villages in India.

Bold Nuclear Power Expansion Drive

REC is making bold moves towards financing nuclear power projects and other green energy initiatives.

The company aims to invest a massive Rs 6 trillion (tn) by 2030 in renewable and nuclear energy sectors.

As part of this vision, REC has committed to sanctioning at least Rs 1 tn annually to green projects, ensuring steady support for the energy transition throughout the decade.

According to REC's managing director, the company is exploring options to finance nuclear power projects, recognizing nuclear as a crucial non-fossil fuel source.

While REC has had discussions with the Nuclear Power Corporation of India (NPCIL) regarding upcoming projects, no concrete proposals have been finalized yet.

This initiative to fund nuclear energy comes at a pivotal time when the government is pushing to increase India's nuclear power capacity from the current 8 GW to 22.4 GW.

At the recently concluded "RE-Invest 2024" conclave, REC made the highest financial commitment among public sector banks and NBFCs for supporting India's green energy transition.

The company signed agreements for loans worth Rs 1.1 tn during the event in Gandhinagar, Gujarat, highlighting its determination to drive India's energy future.

International Transmission Project

REC Ltd is looking beyond India's borders as it explores international transmission projects. While the company has diversified into non-power infrastructure sectors, recent disbursals in these areas have slowed, with REC's focus shifting back to coal-based power and green energy projects.

One of the most promising ventures under consideration is the India-Sri Lanka transmission line, which would mark a significant step in strengthening regional energy ties.

With South East Asia presenting substantial opportunities, REC views this as the nearest international market for growth.

However, such projects require approval from the Reserve Bank of India (RBI) before moving forward, signalling the need to navigate regulatory landscapes before realizing these cross-border energy ambitions.

Strategic Borrowing Plan

REC Ltd is on track to secure US$ 20 bn (Rs 1.6 tn) during the current financial year, having already disbursed approximately Rs 840 bn in FY25.

The company is leveraging external borrowing at lower interest rates and utilizing 54EC capital gain bonds as attractive fundraising options for its non-banking financial company (NBFC) operations.

To maintain a balanced financial strategy, REC follows a judicious mix of borrowing sources. Up to 40% of its funding can come from domestic corporate bonds, while 18% is sourced from domestic term loans provided by banks.

Additionally, 10% of its borrowing is derived from 54EC bonds. This diversified approach allows REC to optimize its capital structure while supporting its ambitious green energy and infrastructure initiatives.

Further, REC on 30 September raised US$ 500 m through green dollar bonds to support various renewable energy projects.

A Look at the Financials

For the June 2024 quarter, its net interest income surged 31.5% YoY to Rs 44.8 bn, up from Rs 34.1 bn a year back. It's net profit for the quarter rose by 14.75 to Rs 34.4 bn, up from Rs 30 bn a year back.

The Capital to Risk-Weighted Assets Ratio (CRAR) improved to 27.6%, up from 25.8% YoY.

The Gross Non-Performing Assets (GNPA) ratio improved to 2.6%, from 2.7% in the previous quarter, while the Net Non-Performing Assets (NNPA) ratio decreased to 0.8%, compared to 0.9% in the last quarter.

Financial Snapshot (FY20-24)

(Rs m, Consolidated)	FY20	FY21	FY22	FY23	FY24
Net Interest Income (NII)	109,544.00	140,610.00	172,152.00	157,369.00	175,400.00
NII Growth (%)	36.6	39.5	43.8	39.9	36.9
Net Profit	49,723.00	83,782.00	100,357.00	111,670.00	141,455.00
Net Profit Margin (%)	16.6	23.6	25.6	28.3	29.8
Return on Equity (%)	14	19.1	19.6	19.2	20.4

Net Interest Income (NII) has seen consistent growth over the five-year period, representing a compound annual growth rate (CAGR) 24.7%. Its net profit has also experienced a CAGR of 19.8%.

Return on equity (RoE) increased from 14.0% in FY20 to 20.4% in FY24, reflecting an upward trajectory in shareholder returns, with ROE average of 37%.

What's Next?

REC aims to increase its renewable energy loan book to Rs 3 tn by 2030, which would account for 30% of its total loan portfolio. The company is also diversifying into non-power infrastructure sectors like roads and water supply.

In a strategic initiative, REC is poised to disburse up to Rs 1.75 tn in loans for coal-fired power plants by 2032, supporting India's goal of adding 80 gigawatts (GW) of thermal power capacity in that period.

REC's Director of Projects highlighted that thermal energy will continue to play a vital role in India's economic growth. The company plans to finance around 25 GW of this capacity expansion.

This increase in thermal capacity will come from two to three sectors, with approximately 50,000-55,000 MW expected from the public sector, which is typically where REC provides funding.

With sufficient capital available, REC is targeting close to 50% capacity financing, which will develop in phases.

Total sanctions are anticipated to range between Rs 1.5 tn and Rs 1.75 tn. By financing around 25,000 MW, the overall investment would be about Rs 2.5 tn, with the potential for REC to finance approximately Rs 1.75 tn in collaboration with partners in consortium mode for large projects.

Conclusion

In a significant move for India's energy sector, Finance Minister Nirmala Sitharaman announced key nuclear energy initiatives in the Union Budget 2024.

The government plans to collaborate with the private sector to establish Bharat Small Reactors and to further research on small modular reactors and innovative nuclear technologies.

This strategic shift aims to enhance the contribution of nuclear energy to India's power generation mix, moving away from traditional large-scale nuclear plants to more flexible and cost-effective solutions.

The renewed focus on nuclear power is expected to benefit companies like REC, which finance such projects.

As the industry gears up for these advancements, firms in this space are well-positioned to capitalize on the growing demand and emerging opportunities in the nuclear sector, thereby establishing themselves at the forefront of India's evolving energy landscape.

Nevertheless, it is always prudent to conduct thorough research before making any investment decisions. Ensure investment aligns with your financial objectives and matches your risk tolerance level.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...