REC FPO opens; should you subscribe?

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REC FPO opens; should you subscribe?

The follow-on public offer (FPO) of Rural Electrification Corporation (REC) has opened for subscription. Experts were mixed in their opinion while brokerage houses said the issue looked attractive and advised subscribing the issue.

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Sushil Finance says, "Considering its post issue paid up equity, at the floor price of Rs 203, its P/ABV (as of December 2009) calculation works out to about 1.8x. On the back of rising investment in the power sector, high level of sanctions (5x FY09 loan disbursement), low funding cost (due to AAA rating and right to issue Sec 54EC tax free bond), nodal agency status for various government sponsored power projects, almost NIL NPAs and sustainable ROE of about 20%, we assign a "A" Rating to the IPO and recommend our investors to subscribe the issue."

Maximus Securities says, "As REC and PFC both are government controlled companies and more or less in the same business and share a similar profile, we have compared both the Companies. PFC looks financially sound than REC. PFC's net NPAs and D/E ratio is less when compared to REC. However post issue REC's leverage ratio will reduce to 5 x. Valuation wise too REC is cheaper than PFC. Its P/BV (Pre-FPO) ratio is 2.28x compared to 2.37x of PFC. Post FPO the P/BV of REC will be 1.96x thus making it an attractive buy when compared to its peer."

"At the floor price of Rs 203, the stock is available at 1.5x FY2011E Adjusted Book Value of Rs132 and 1.3x FY2012E Adjusted Book Value of Rs 151. The valuations compare favourably with its closest peer, PFC, which is trading at 1.8x FY2011E Adjusted Book Value of Rs130 and 1.6x FY2012E Adjusted Book Value of Rs 150 (at the CMP of Rs235). We believe that REC can command up to 1.75x on its FY2012E Adjusted Book Value, implying a reasonable upside. Hence, we recommend a subscribe view on the issue," according to Angel Securities report.