Rural Electrification Corporation (REC) is a huge term lending financial company. It deals with financing and promoting the rural electrification projects. REC has been doing extremely well lately and is expected to continue to do good. If you see from a general point of view, rural areas in India is highly underdeveloped and a lot of development is supposed to happen there. Many such areas have minimal or no power at all and so the whole thing of financing power projects in rural areas sounds like a great idea. REC can be a company you can invest from a long period of time and expect good returns from it.

Rural Electrification Corporation’s management in an interview by CNBC TV18 has said that they are looking to grow loans at a rate of 20-25% for the this as well as next year. Currently loan book stands close to 80,000 crores and that is set to cross 1,00,000 crore next year in FY12. These figures itself speaks volumes about the company and it’s potential along with the basic assumption of growth in the rural sector which is promising.

REC posted net sales of 2026cr (+27% YoY) and net profit of 618cr (+25% YoY) in Q2 FY11. Q1 FY11 reported net sales of 1899cr (+30% YoY) and net profit of 587cr (+25% YoY). Also management has promised to maintain the growth of over 20% in the coming quarters and the next Fiscal also. I think that is sufficient enough to drag one into the stock. With the similar growth, I expect the company to end up with 2500cr+ of net profit in the FY11 and with a P/E of 15 which is industry P/E, the stock can easily climb to levels of 370, an upside of almost 40% from current levels.

As far as REC’s stock price is concerned, it has been beaten down from 400 odd levels to almost 270 now on fears of interest rate hikes and bla bla whatsoever reason. I really don’t think there is any big change that happened or is going to happen that will dampen the company’s earnings in the long run. I clearly claim this financial sector sell off as an over reaction which looks like over done anyway. So this is the right time to enter the stock according to me.

Buy REC(cmp: 270) with targets of 370 in 6-8 months.

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