Amid expectations that its offering will light up the beleaguered IPO scenario, state-owned Rural Electrification Corporation (REC) is entering the capital markets on Tuesday, expecting to raise Rs 1,600 crore. REC is out with a public issue of 156,120,000 equity shares of Rs 10 each through a 100 per cent book building process with a price band of Rs 90-Rs 105.
The issue shall constitute over 18.18 per cent of the fully diluted post-issue capital of REC. IL&FS Investsmart Securities Ltd, ICICI Securities Ltd and SBI Capital Markets Ltd are the book running lead managers of the issue. The equity shares are proposed to be listed on NSE and BSE.
Broking houses and analysts across the board are gung-ho over the REC IPO with many of them recommending "subscribe" to the issue.
Reliance Money noted in its analysis: "According to the working group of the power sector the total fund required for the total power sector during the eleventh plan is Rs 8.37 trillion. By FY'07 the total credit outstanding by all the institutions to the power sector stands at around Rs. 1.4 trillion. Therefore looking at the estimated requirement of the power sector the scope is huge for companies like REC."
Religare Securities believes that REC is reasonably priced; considering the strong business growth and comparatively lower valuation and available at a P/BV of 1.8x at the end of September 2007 at the higher end of the price band. Post-issue, the stock would trade at 1.5x FY08E book value. REC's business model is comparable to PFC which, at the current price of Rs 185, trades at 2.3x on FY08E P/BV.
In the past few months, the power sector (on which REC is an indirect play) has seen valuations reaching frothy levels, only to come off recently. Against this backdrop, Angel believes the REC issue comes at a reasonable price based on fundamental value, considering the high visibility of credit demand in the power finance sector, REC's strong positioning in the same and its reasonably strong financial performance.
Said investment advisor S P Tulsian: "We feel that in this turmoil, when primary market is not at all comforting with any good IPO, this is a better issue, where investors can safely apply for reasonable gains."
Meanwhile, REC Chairman and Managing Director Anil Kumar Lakhina has sought to dispel the feeling in certain quarters that REC stands for electrifying only villages. "We are a diversified power infrastructure company and are not subsidized. We are a profit making company and have a consistent track record of performance winning the excellent ratings from the government consistently for 13 years from 1994." he said.
REC's loan sanctions and disbursements have grown at a CAGR of 28.37 per cent and 13.51 per cent, respectively between fiscal 2003 and 2007. Its loan sanctions amounted to Rs 329,254 million and disbursements Rs 107,328 million. Its PAT has grown at a CAGR of 8.92 per cent from Rs 4,854 million in Fiscal 2003 to Rs 6,831 million in fiscal 2007.
The size of REC's business can gauged from the fact that its loan asset has grown at a CAGR of 18.35 per cent from Rs 159,357 in FY '03 to Rs 312,622 in FY '07. As on March 31, 2007 REC had total assets of Rs 362,034 million net worth of Rs 38,070 million.
The IPO comes close on the heels of the government mandating REC and Power Finance Corporation (PFC) to ensure that viable projects do not suffer for want of funds as the government has drawn up plans to bridge the demand-supply yawning gap in power sector.
The Working Group on Power for the Eleventh Plan (2007-12) based on certain government has estimated a total fund requirement of about Rs 10,31,600 crore for the power sector as a whole.
The government has already set up an inter-institutional group with leading FIs and banks to facilitate financial closure in respect of private sector projects.
The government's Eleventh Plan (2008-2012) anticipates a substantial increase in the country's power capacity. The Ministry of Power's data shows that India's power generation system, as on March 31, 2007, had a total installed capacity of 132,330 MW and an additional 78,577MW are required to meet the projected demand during the plan period. Thus, the overall fund requirement by 2012 for the sector has been estimated at a whopping Rs 10,316,000 million.
As much as half of the capacity addition is expected to be contributed by the centre, while the states' contribution is bout 35.6 per cent. A 10,760 MW addition (13.7 per cent) is expected to come from the private sector. |
