Subscribe to Rural Electrification Corp IPO: SKP Sec

SKP Securities has come out with research report on Rural Electrification Corporation IPO. It has recommended to subscribe to the issue.

Rural Electrification Corporation (REC), one of the leading public financial institutions in Indian power infrastructure, proposes to enter the capital markets on February 19, 2008 with a public issue of 156,120,000 equity shares of Rs 10 each through 100% book building process.

SKP Securities report on Rural Electrification Corporation IPO

Key Positives

• The 11th Plan envisages to add 70,000 MW of power capacity during the plan period. The investments needed in the transmission and distribution sectors - during the 11th Plan itself - are expected to be Rs. 10,00,000 crore. This augurs well for REC.
• Since REC received its expanded mandate in 2002-03 to finance all kinds of generation projects, sanctions and disbursements have grown alomst 10 times and 17 times respectively by 2005-06. The share in private sector had also gone upto 36% in 2005-06. Therefore the perception that REC is solely about village electrification is untrue. REC is playing a much larger role. It has developed into a robust agency that provides technological and financial support to all the three sectors: generation, transmission and distribution.
• REC has been ranked among the top ten public sector undertakings for the financial years 1999-2000, 2001-2002, 2004-2005 by the Ministry of Heavy Industries and Public Enterprises, GoI.
• REC is into generation project finance, though relatively new. REC is the lead financial institution responsible for syndicating loans in as many as seven projects. Projects that would generate 4,285 MW of hydro and thermal power. REC Transmission Projects Company Limited has been established and has commenced its business operations. REC Transmission has been appointed as the nodal agency for 2 transmission projects on ‘Build, Own and Operate’ basis. REC has also established REC Power Distribution Company Ltd. for the purpose of operating and providing consultancy services with respect to distribution systems.
• REC operates at an NIM of over 3%, the net NPA level was 1.85% for FY2007.

Concerns

• REC has advanced 90.75% of its total advances to SEB's and SPU’s , many of which are loss making and may have liquidity issues leading to non-payment or delay in payment of dues.
• With a short fall being faced for manpower and project equipments many upcoming projects may get delayed thereby inflating project cost and also increasing the payback time of such loans thereby negatively impacting the earnings of REC.

Recommendation

REC seems to be appropriately poised for capturing the growth opportunity presented by the power sector. The issue price band of Rs 90-105 implies a PER of 9.65-11.26X on H1FY08 annualised EPS of Rs 9.32 (on diluted equity).

With huge investments to come into power generation and such high levels of T&D losses, we feel there will be no dearth of demand for an experienced and established fund mobiliser like REC, we recommend to subscribe to the issue.