Rural Electrification Corporation deals in the financing and promoting of transmission, distribution and generation projects. It provides help in funding, formulation and implementation of various power project-related schemes for its clients. Considering the higher end of the price band, the company intends to raise capital of around Rs 1,639 crore. With this the company plans to meet future capital requirements arising out of growth of assets, primarily their loan and investment portfolio due to the growth of the Indian economy and for other general corporate purposes.
The underlying facts
The company essentially finances most rural power projects, majority being undertaken by public sector utilities and a few by private sector ones. The bulk of the company?s profits arise out of being able to raise money at a far cheaper rate than its competitors. It largely issues tax saving bonds (accounting for around 70% of its source of funds), which enable it to price its bonds at a lower interest rate.
Historically, REC?s main focus has been financing electrification projects, primarily comprising transmission and distribution projects of state PSUs and SEBs, in rural areas. This is a niche created by the company. PFC, on the other hand, focusses on power generation companies. However, its role is expected to enlarge as the total demand for financing grows.
According to the 11th plan (2007-2012), it is estimated that Rs 10.3 lakh crore of financing will be required to set up the power infrastructure. And based on the working group estimate, REC will provide around Rs 59,150 crore worth funding. This clearly means that the business growth will be strong. The enhancement of its capital base will mean an increase in ability to borrow as well.
One of the concerns that investors could have is that the public sector power companies form more than 95% of its lending profile and some of these loss making units could delay payments. But around 91% of the loans are either secured or enjoy government guarantee. They also have the cushion of the default escrow account mechanism to provide further security. Due to this, gross NPAs are 0.9% of total loans, and is considered to be healthy.
Bottom line
Over the past five years, its net profit has grown at a compounded rate of 14.5%. Its net profit was Rs 5.2 crore for the six months of FY08. Its performance at the revenue level has been strong, though rather inconsistent.
Based on the annualised earnings, considering post-issue capital, the company has EPS of Rs 12.18 with P/E of 7.39(x) and 8.62(x) at the lower and the higher end of the price band. This compares well with other peers in the field.
A few hindrances or concerns are worth noting. One could arise from the government?s ability to execute power projects. Competition could create a squeeze on the margins and so would the withdrawal of tax-concessions.
These are some of the factors that investors should consider before taking the plunge.