Keynore Capitals has come out with research report on Rural Electrification Corporation, REC IPO. It has recommended a subscribe to the issue with a medium term view.
REC has opened for subscription with a public issue of 15.6 crore equity shares of Rs 10 each at a price band of Rs 90-105 and the issue will close on February 22, 2008.
Keynore Capitals report on Rural Electrification Corporation IPO
* REC is a leading power sector focused, public financial institution and NBFC. It finances power projects in power generation, transmission and distribution, throughout India. It has been designated as the nodal agency by the Government of India (GOI) for Rajiv Gandhi Gramin Vidyutikaran Yojana (RGGVY).
* Loan disbursements grew at a CAGR of 78.3% during FY04-07.
* The transmission and distribution (T&D) sector accounted for 85% of disbursements. Public sector lending formed 97% of overall lending in FY07. NIM stood at 3.8% in H1-FY08. REC’s role as an instrument of government policy results in low cost of borrowings.
* The 11th Plan envisages power demand of 78,577MW, with funds requirement of Rs 10,316 billion. This will translate into huge need of funds for investment in the power sector. Being the leading and exclusive provider of power finance in the country, REC expects to fund approx. 20% of the aggregate funds requirement.
* Comparison with closest peer PFC reveals the following
- Both exclusively fund the power sector
- NPAs for REC is 1.9% which is higher vis-à-vis 0.06% for PFC
- Debt-equity ratio of 7.3x, vis-à-vis 3.4x for PFC. (maximum permissible 12x)
- Average cost of funds for REC is 6.5% vis-à-vis 7.3% for PFC
* We believe there is scope for value creation / unlocking going forward, through recently set up, wholly-owned subsidiaries in transmission and distribution, which would undertake more profitable businesses.
* REC Power Distribution Co. Ltd., which provides consultancy services, recently won a Rs12.5Cr order from Punjab State Electricity Board (PSEB) for consultancy work. As per media reports, REC is also likely to acquire a 5% stake in Indian Energy Exchange, which is proposed to launched soon.
* The IPO is reasonably priced at p/b of 1.7xFY08E, 1.4xFY09E and 1.1xFY10E vis-à-vis PFC (p/b of 2.3xFY08E, 2.0xFY09E and 1.1xFY10E). It is attractively priced at p/e of 9.8xFY08E, 7.5xFY09E and 6.1xFY10E compared to its peers PFC and leading lending institution IDFC. We recommend subscribing with a medium term view.
Investment Concerns
* Any change in the Government and / or political instability could affect economic conditions in the country and the sector too.
* India’s inability to achieve the targets of capacity addition would lead to reduced financing opportunities. During the 10th plan, capacity added was 21,110 MW, which was just 51.7% of the targeted 41,110 MW.
* Being a power financing institution, any negative trends in the power sector could adversely affect its business operations.
* Any volatility in interest rates will have adverse impact on business operations.
* If there is withdrawal of the benefit of Sec. 54EC of the Income Tax Act, it would increase the cost of funds leading to a hit on NIM.
* Top 10 borrowers accounted for 52.7% of total outstanding loans. Any negative trends or financial difficulties particularly among large borrowers could increase the level of NPAs.
* It has reported negative cash flows from operations since FY03.
Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Source: Moneycontrol.com
Wednesday, February 20, 2008
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