Rural Electrification Corporation Ltd. IPO Review (Subscribe)

Review By Chittorgarh.com Team on May 4, 2008

  • Issue Opens: TUESDAY, FEBRUARY 19, 2008
  • Issue Closes: FRIDAY, FEBRUARY 22, 2008
  • Price Band: Rs 90-105 per share
  • Face Value: Rs 10 per share
  • Equity Shares outstanding prior to the issue: 780,600,000 Equity Shares
  • Equity Shares outstanding after the issue: 858,660,000 Equity Shares
  • Size of issue: Up to 156,120,000 Equity Shares (Rs 1405 cr and Rs 1639 cr at lower and upper band)
  • Shareholding before the issue: 100% government
  • Shareholding after the issue: 81.82% government and 18.18% public
  • IPO Rating by CRISIL: 3/5 (This grade indicates that the fundamentals of the issue are average, in relation to other listed equity securities in India)

Issue objects

  • To meet the future capital requirements arising out of growth in our assets, primarily our loan and investment portfolio due to the growth of the Indian economy.
  • General corporate purposes including meeting the expenses of the Issue.
  • Rural Electrification Corporation is one of the leading public financial institutions in Indian power infrastructure engaged in the financing and promotion of transmission, distribution and generation projects throughout India.
  • REC commenced its operations in 1969 for the purpose of developing the power infrastructure in rural areas and has contributed to the development of rural India and India's agriculture. Its emphasis continues to be on the development of electrification of rural areas but REC is now permitted to finance all segments of the power sector throughout the country.

Company Business

  1. Power Financing
    REC provide funding to its clients and assist them in formulating and implementing various types of power project related schemes Its financial products primarily include long-term loans, short-term loans, bridge loans and debt refinancing.
  2. Funding of Business
    We fund our business with market borrowings of various maturities, including bonds and term loans. Because our sources enable us to raise funds at competitive costs, we believe we are able to price our financial products competitively.
  3. Clients
    Its clients include public sector power utilities at the central and state levels and private sector power utilities Additionally, it funds power projects for its joint sector clients.
  • Rural Electrification Corporation is one of the leading public financial institutions in Indian power infrastructure engaged in the financing and promotion of transmission, distribution and generation projects throughout India.
  • REC commenced its operations in 1969 for the purpose of developing the power infrastructure in rural areas and has contributed to the development of rural India and India's agriculture. Its emphasis continues to be on the development of electrification of rural areas but REC is now permitted to finance all segments of the power sector throughout the country.
  HS07 HS06 YOY YM07 YM06 YOY
Sales (Rs Cr) 1791.7 1314.8 36.27 2932.8 2449.8 19.72
Net Profit (Rs Cr) 522.8 288.7 81.09 775 807.9 -4.07
Net Profit Margin 29.18 21.96   26.43 32.98  
Net Interest Margin (%) 3.76     3.30 3.20  
Net Worth (Rs Cr) 4176.30 3433.00 21.65 3682.70 3123.00 17.92
Book Value (Rs) 53.50 43.98 21.65 47.18 40.01 17.92
Return on Average Net Worth (%) 27.48     22.78 28.18  
Gross NPA (as % of total assets) 0.90     2.39 1.73  
Net NPA (as % of total assets) 0.67     1.87 0.78  
             
             
No of Shares before the issue (Cr) 78.06          
No of Shares after the issue(Cr) 85.86          
EPS (last twelve months) (Rs) 11.75          
Share Price at upper band 105   Price Earning Ratio 8.93
Share Price at lower band 90.00   Price Earning Ratio 7.66
             
Book Value after the issue at upper band (Rs)     58.18      
Price to book value at upper band     1.80      
Book Value after the issue at lower band (Rs)     56.82      
Price to book value at lower band     1.58      

Industry overview

  • India is a power deficit country with electricity consumption of 612 units per year as compared to world average of 2596
  • As Indian economy grows power demand will also grow and to meet this demand huge investments are required. This presents a huge opportunity for power financing players like REC.

Peers

  • Power Finance Corporation
  • Financial Institutions like IDFC, IIFC, IFCI
  • Banks
  • International Development Financial Institutions like World Bank

Peers comparison

Rural Electrification Corporation and Power Finance Corporation both are government controlled companies and more or less in the same business and have a similar profile.

  REC PFC Comments
Trailing 12 months price earning ratio 8.93 16.5 significantly cheap as compared to PFC
Price to book value 1.80 2.32 cheap as compared to PFC
Gross NPA (as % of total assets) 0.90% as of Sep 07 .03% as of Dec 07 indicates bad loans are much higher for REC
Net Interest Margin (%) 3.76 as of Sep 07 3.75% as of Dec 07  
Return on Average Net Worth (%) 27.48 as of Sep 07 14.36 as of Dec 07  
Sales for the year ending March 07 (Rs Cr) 2932.8 3927.6  
Net Profit for the year ending March 07 (Rs Cr) 775 986.1  
Net Worth (Rs Cr) 4176.3 as of Sep 07 8886 as of Dec 07  
Market Capitalization (Rs Cr) 9015.3 21136  
Reputuation Mini Ratna Navratna PFC has already ventured into fee based income and possesses better business fundamentals as compared to REC

Reason to invest

  • Unique Position
    REC occupies a unique position within the area of rural electrification of India and will continue to play an integral role in implementing the GoI's rural electrification strategy. It currently administers grants and provide loans as the nodal agency for the RGGVY, which is primarily aimed at the electrification of all villages in India.
  • Mini Ratna Grade 1
    As a public sector undertaking, REC has been accorded "Mini Ratna Grade-I" status by the GoI by virtue of our operational efficiency and financial strength. REC has been rated as "Excellent" for its performance continuously from Fiscal 1994 through Fiscal 2007 by GOI. REC has also been ranked among the top ten public sector undertakings in India by the Ministry of Heavy Industries and Public Enterprises for Fiscal 2000, Fiscal 2002 and Fiscal 2005.
  • Huge Investment to meet the power demand
    According to data from the MoP, an additional 78,577 MW are required to meet the projected demand during the Eleventh Plan. The overall requirement of funds in the Eleventh Plan for the power sector has been estimated at Rs. 10,316,000 million. REC will be the main beneficiary of this demand.
  • Increasing Loan Book
    REC's loan sanctions and loan disbursements have grown at a CAGR of 28.37% and 13.51%, respectively, between Fiscal 2003 and Fiscal 2007.
  • Strong Financial Position
    REC is a profitable company with a strong financial position.
  • Competitive Fund Raising
    REC's overall cost of funds was 6.55% for the six months ended September 30, 2007, which is quite competitve.
  • Lending to private sector
    REC's lending to private sector as % of its total lending has been 1.33% in 2005, 3.01% in 2006, 2.65% in 2007 and 5.92% as of 30th september 2007. The share of lending to private sector has been increasing which is a good sign.

Reason not to invest

  • Credit Profile of Borrowers
    Many of the borrowers of REC to whom it lends are public sector utilities that are loss making and therefore may not have liquidity to repay their borrowings. As of September 30, 2007 the exposure to such state sector borrowers constituted 96.33% of REC's total loans.
  • Competition
    There is heavy competition among Indian public and private sector banks, foreign banks operating in India and financial institutions to lend to the power sector. These competitive pressures affect the Indian financial sector and REC's growth will depend in large part on its ability to respond in an effective and timely manner to competitive pressures.

IPO Grading

  • This Issue has been graded by CRISIL Limited as 3/5 indicating Average Fundamentals, pursuant to the SEBI Guidelines.

Investment Strategy

  1. Listing Gains
    • Listing gains possibility depends on the market sentiment at the time of listing. .
    • Considering that issue is priced at very reasonable valuations chances of loosing money are slim but in case market crashes market price can dip below the issue price.
    • Chances of significant listing gains are slim but in case markets are peforming well the stock price can touch 130 also though chances of that happening are very less.
    • If you want to take risk and do not fear loosing some money you can subscribe to the issue and hope for making some quick money.
  2. Long term Gains (atleast 6 months)
    • Investors subscribing for long term should get a decent return on their investment.

Conclusion / Investment Strategy

  • REC is present in power financing business which presents huge opportunity to REC considering the power situation in India and the thrust given by government to power generation.
  • REC is available at a very reasonable valuation. Even though it compares less favourably with Power Finance Coporation (see the comparison) the cheap valuation of REC makes it a good investment opportunity. We recommend subscribing to the issue from a long term perspective (atleast 6 months).

Reviewer recommends Subscribing to the issue.

Review By Chittorgarh.com Team on May 4, 2008









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