REC Limited is tapping the capital markets with a follow on public offer for 17.17 cr shares which includes an offer for sale by the principal shareholder, the government of India of 4.29 cr shares. In short the issue would raise 75% for the company and 25% for the government of India. The issue has opened on Friday the 19th of February and closes on Tuesday the 23rd of February 2010. In
| Floor Price | Rs.203 per Equity Share |
| Employee Price | Discount of Rs 10 per share on floor price |
| Issue Size assuming floor price | Rs3486.1596 crs |
| Market Capitalisation post issue (at floor price) | Rs 20045.42 crs |
| Fresh issue by the Company | 12,87,99,000 equity shares |
| Offer for sale by existing shareholders | 4,29,33,000 equity shares |
| Total Issue Size | 17,17,32,000 equity shares |
| Reservation for Employees | 3,50,000 equity shares |
| Net Issue Size | 17,13,82,000 equity Shares |
| QIBs | 8,56,91,000 equity shares |
| Non-Institutional Buyers | 2,57,07,300 equity shares |
| Retail Individual Bidders | 5,99,83,700 equity shares |
| Equity shares outstanding after the Issue | 98,74,59,000 equity shares |
| Issue opens on | Friday, February 19, 2010 |
| Issue closes on | Tuesday, February 23, 2010 |
| Book Running Lead Manager | Kotak Mahindra Capital Company Limited |
| DSP Merrill Lynch Limited | |
| ICICI Securities Limited | |
| J M Financial Consultants Private Limited | |
| RBS Equities (India) Limited | |
| IPO Grading | Listed entity – hence not applicable |
| Bidding Lot Size | 30 shares |
Business
REC Limited or Rural Electrification Corporation of India Limited was set up in 1969 as a financial institution to finance the power infrastructure in rural India. Over time the view and scope of the company has been broadened to finance other segments as well. REC has a very clear business focus where it finances on the basis of projects and is a long term project financer in the power generation transmission and distribution business. Recently realising the potential and the need for financing mining operations, REC has started the financing of mining operations.
REC had a loan book of Rs 50,700 crs as of 31st March 2009, which has increased to Rs 57,900 crs as of 30th September 2009. The mix of the loan book consists of 55% loan in the T&D business or transmission and distribution business, 38% in generation and 7% in others.
The government of India initiated reforms in the power sector and unbundled the State Electricity boards (SEB) into generation and transmission and distribution companies. This unbundling helped the realisation of payments from the SEB and helped the companies which were involved in financing such institutions.
The government promoted specific units to finance the power sector and REC and PFC or Power Finance Corporation are two such major entities. The biggest drivers for growth in the power sector in India can be summed up by saying that there is a low per capita consumption, and inspite of this low consumption there is a huge energy deficit in the country. The removal or bridging of this deficit would lead to a huge financing requirement and if these capacities are set up, then the nation or country would see huge capacity additions.
All in all the opportunity to grow by increasing the loan book is much more than required and for REC to double its loan book in the next two and a half years does not seem out of place.
Objects of the issue
The object of the issue is to augment the capital base to meet the company’s future capital requirements arising out of growth in the business. Very clearly with just two major players in the long term financing segment in REC and PFC, and both being government institutions, the scope, opportunity and requirement is huge by all standards.
Financials
REC is a finance company and its business could be compared to a bank, with two major differences. The first difference is that almost the entire lending by REC is of a long term lending and is usually for periods far longer than what commercial banks would lend and secondly that all of REC’s loans would qualify as priority sector lending. The net margins enjoyed by REC have improved in the half year ended September 2009 to 4.54% compared to 4.17% for the year ended March 2009. The company has virtually nil NPA’s and this has been helped to a great extent when the power sector reforms were carried out some 7-9 years ago.
The company enjoys spreads of 3.36% in March 2009, which have improved to 3.71% in the half year ended September 2009. The cost of funds over the same period has gone up from 7.31% to 7.52% and the net interest margins or NIM’s have improved from 4.17 to 4.54. The total income for the year ended March 2008 was Rs 2054 crs which rose to Rs 2887 crs for the year ended March 2009 and Rs 1804 crs for the half year ended September 2009. The profit after tax for the same period was Rs 958 crs, which improved to Rs 1385 crs and for the half year improved further to Rs 928 crs. If one were to look at the EPS the same was Rs 12.28, improving to Rs 16.03 and Rs 10.81 for the half year ended September 2009. If one were to annualise the half year earnings the same would be Rs 21.62.
Comparisons
The best comparison for this company would be PFC or Power Finance Corporation Limited. PFC reported an EPS of Rs 17.16 for the year ended March 2009 and Rs 20.40 for the nine months ended December 2009 on an annualised basis. The price earnings multiple based on the nine months annualised earnings would be 11.52 times based on the market price of Rs 235.05 that the share closed on Friday the 19th of February at the BSE. In comparison the EPS of REC of Rs 21.62 on six months annualised earnings September 2009, would mean a price earnings multiple of 9.89. REC closed at Rs 213.95 on Friday.
It may be mentioned here that the company has declared audited numbers for the half year ended September 2009 in the RHP, but has also declared unaudited quarterly numbers for the period ended December 2009. If one were to annualise the nine months numbers the EPS would improve from 21.62 to Rs 22.38, a change of 3.5%. Very clearly the share of REC is far cheaper than that of PFC.
The follow on offer is being done at a floor price of Rs 203 for HNI’s and retail. Based on the half yearly audited numbers for September 2009 and then annualised, the PE ratio would be 9.34. This makes the issue very attractive.
Conclusion
The issue from REC comes at a time when markets are in a sort of bear grip with prices falling. The markets seem uncertain going forward. The stock price of REC is no exception and has been battered in this fall and has lost substantial ground. The stock price closed at Rs 213.95 on Friday which means the floor price is at a discount of Rs 10.95 or 5.39% even today.
The issue is attractively valued and the power sector poised for huge growth. It may be mentioned that the earlier issue from REC opened on the same date 19th February 2008 and the issue was priced at Rs 105. The performance of the company is in the fact that in exactly two years the company is back to the markets with an issue at double the price. This vindicated the performance and the confidence that the market has in the company.
Investors looking at steady and assured growth must take advantage of the attractive and effective discount that is being offered. The issue size is large and allotment in the retail category would in all probability be 100%. Subscribe to the issue for decent returns.
SEBI disclaimer: – I intend to subscribe to the issue
