Power Packed Offer from REC

The IPO market is in shambles after the Reliance Power fiasco and Power is a dirty word in the market circles. Investors who lost money in the Reliance Power issue are still suffering from the aftermath of the 430 volt shock. In these circumstances REC (Rural Electrification Corporation) is coming out with a reasonably priced offer to raise Rs.1400-1600 cr. in the price band of Rs.90-105. Primary market investors may take an exposure in this issue for decent long term gains. As the oversubscription is likely to be low given the current sentiment, the chances of allotment will be fairly high. Invest with a minimum application for 120 shares (RS.12600).

The plus points of REC issue:

• It is a Public Sector Power finance company engaged in diversified financing of power trasmission, distribution and generation projects.
• The govt thrust on 'Power for all' by 2012 requires massive investment in Transmission and Distribution infrastructure.
• It is an existing profit making company with a healthy net interest margin of around 3.3% for FY07.
• REC has access to cheap resources such as Capital Gain Bonds (under IT ACT), and other taxable bonds. Its average cost of funds is under 6.60% currently.
• It is favourably placed against its peer level companies like PFC. Its return on net worth at 21% is signifactly higher than that of PFC. Its outstanding loan assets for FY07 are Rs. 31,974 crores.
• On the post issue Equity capital of Rs.859 Cr. it is valued at 7-8 times its expected FY08 earnings.

The major risk factors:

• Ability to raise cheap funds in the future, given the tax advantages enjoyed by it currently.
• The possibility of delays in payments from its clients primarily State Electricity Boards.

Considering all the above factors the issue deserves a closer look by long term investors.