Rural Electrification Corporation - Compelling Valuation

Rural electrification Corporation (REC) is one of the leading public financial institutions in Indian power infrastructure. REC is engaged in the financing and promotion of transmission, distribution and generation projects throughout India. The company has come out with a IPO of 15.61 crore shares at a price band of 90-105 Rs.

This Issue has been assigned CRISIL IPO GRADE 3/5, indicating that the fundamentals of the issue are average, in relation to other listed equity securities.

At the upper price band of Rs. 105/- the stock is available at 13.65 times it FY07 EPS of 7.69 on a post-diluted equity base. In the first half of FY08 the company topline grew by 30% and the bottomline by around 25%. Based on the annualized FY08E EPS of the 9.32 the stock at the upper price band is valued at around 11.26 times it's earnings on a post-diluted equity base.

At the upper price band the IPO is priced attractively compared to its peer Power Finance Corporation (PFC). PFC is currently trading at 16.7 times it's FY08E EPS against REC offer of 11.26 times.

REC gross non-performing assets (NPA) stand at well under 2.39 percents of its total outstanding loan assets. It also posted a healthy net interest margin of 3.30 per cent in FY07 on par with leading banking and financial services.

We recommend Invest on REC IPO with a horizon of one year. Those looking for listing gains can do so at their own risk. Our recommendation is based on the compelling valuation at the current price band and to profit from the huge Investment required by the power sector as part of the 12th planning commission.

Fundamentals

1) Robust Financial Performance.
2) Availability of cheap funding.
3) India huge investment plan in Power and Infrastructure sector by the terminal year 2012.

Risks

1) Continued access to cheap funds through tax free capital gain bonds.
2) Delay in payments from SEBs and rural electricity cooperatives.