Thursday, February 21, 2008

REC - An Attractive 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.

source : moneycontrol