To invest or not to invest in REC IPO?? Presenting a SWOT Analysis..

The REC IPO has already been subscribed fully. Sensible companies will always have a market because this IPO has being priced very attractively. This company lends largely to the power sector projects, especially to the transmission and to the generation space of it. It also mainly participates in the rural power generation projects.

If one takes a look at what this company is likely to do, there is a whole host of business opportunities waiting for it. This company may be looking at putting in USD 592 billion in the 11th Power Plan that the government has laid out - about 15-20% of the total outlay in the 11th Plan will be fully funded by REC. So the company has been growing about 23% CAGR from FY04-FY07 and from here to FY10, they are likely to grow in a CAGR of 20-21%; as per CNBC-Tv18 analysis.

But one biggest concern of this company has been, the spread that they get it on. The biggest positive for REC hs been the cost of funds that they have been able to raise largely because of funds coming in from the government and the section 54 EC bonds that they have been able to raise.

If you take a look at how it is panned out over the past few years, the quantum of bonds that can be given under section 54 EC has been cut down. REC and NHAI are the only two institutions that can come out with these bonds. For REC, they have capped it at Rs 80 billion - REC wanted to raise Rs 45 billion in FY08, of which it has taken only Rs 15 billion in FY07.

The CBDT (Central Board of Direct Taxes) has said that they are rolling it forward. So in this year also, they can raise this money from the market.

But the cost of funds raising after FY09 gets a little bit murky because what happens to the government concession that they have been giving? Will the concession and the Section 54 EC continue? If these don’t continue, the cost of fund which is rather attractive at 6%, which they have been able to lend at 9%, incremental lending at 10%; that is likely to go down. So this is one concern that we have in REC.

But it is very attractively priced at Rs 90-105 on the upper band of Rs 105. On a price-to-earnings basis, it’s at 8.6-times FY08, whereas PFC is at 17.8 and IDFC is at 31.2 FY08 earnings. Being an NBFC, we also looked at the price to book one-year earnings and it is at 1.5-times price-to-book, whereas the PFC is at two-times and IDFC is at 6-times price-to-book. Even on the returns ratio, whether it is returns-on-assets or returns-on-net-worth, it is very attractive compared to these two peers. That’s why you are seeing institutional interest coming in this IPO and it’s also a very good dividend play.

Now, the question is, is there any reason to suspect that this concession received under section 54 EC will not be continued? That is where one has to give the benefit of doubt that maybe at least for these two companies, it will continue. This is because raising funds for these two companies- the list used to be as big as five companies, it is being cut down to two companies in the previous Budget. So whether they will be allowed to, is going to be the important thing.

But attracting cost of funds for these companies has becoming harder and since they are giving it for the rural infrastructure growth only, maybe the government may be happier to just let these two companies continue as it is.


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