RURAL ELECTRIFICATION CORP

Rural Electrification Corporation (REC) is entering the capital market on 19th Feb 2010 with an FPO of 17.17 crore equity shares of Rs.10 each, with floor price having fixed for retail and HNI category, at Rs. 203 per share. The FPO consists a fresh issue of 12.88 crore shares and an Offer for Sale of 4.29 crore equity shares by the Govt. under its divestment programme. 50% of issue is reserved for QIB, 15% for HNIs and 35% for retail category. While HNIs and Retail category will get the allotment at Rs. 203 per share, QIB category will get it above floor price, under French Auction Method. Those who would be bidding maximum price in QIB category, will get full allotment and top down approach for allocation of shares to QIB applicants will be followed. This is exactly how it was in NTPC too! It is said that one learns from mistakes. But looks like the Govt makes one mistake and then gets motivated to commit one more. One would have expected the Govt to have learnt its lessons from the NTPC issue, but looks like the Govt is used to repeating its mistakes time and again and then too, there is no guarantee that it would learn. NTPC FPO scraped through largely on the back of public sector financial institutions like LIC and SBI, who must have also stepped in at the behest of the Govt. Is this the basic role of institutions like LIC and SBI, to bail out the Govt as it is sitting on a huge reserve of cash? This is probably the reason why PSU financial institutions, though very strong and cash flush are eyed with a lot of wary by investors as one does not know, when and how much it would have to cough up to save the face of the Govt. In NTPC, retail investors subscribed only 5.18 crore shares when more than 14 crore shares were reserved for them. Why did the retail investors have no appetite for NTPC? Because of the pricing. NTPC was priced at Rs.201, which was not too much of a discount over the then ruling price of Rs.209. NTPC is currently ruling at Rs.205. And that is not a big gain for those who have applied in the shares through the FPO at Rs.201. If this is track record of NTPC, how can it be encouraging the retail investors, which are generally the same lot. And despite this, the Govt has gone ahead and priced the FPO of REC at Rs.203, which is currently at a discount of just 4%, over the current price of Rs.214. REC, just like NTPC is very volatile. REC had its high of Rs.274 on 19th Jan 10'. And in less than one month, it corrected by Rs.60. What is the guarantee that the price will not slip below the offer price of Rs.203 in the immediate future? The Govt gave no discount to the retail investors in NTPC which had invited a lot of wrath. Unmindful of that, there is no retail discount on REC too. Why? Does the Govt expect the biggies like SBI and LIC to once again step up to rescue or does it not really care too much about retail participation? It also makes one wonder whether the Govt is in such a tearing hurry to get the FPO over and done with, that it has paid no heed to what the market is trying to tell them? If we take total issue size at floor price, it comes to about Rs.3,500 crores. Even if a 5% discount would have been offered on the retail portion, the Govt would have got Rs.60 crore less. But now, by not offering a discount at all, it is kept away over 5 lakh retail investors, who otherwise would have more than made up for the loss on account of the discount, by participating in it. Over and above all these factors, if we look at the issue without the history of NTPC FPO in mind, one wonders what this entire hullabaloo over REC FPO is all about in the first place? If we look at the company logically, without the aura of it being a PSU or a Navratna, it is basically like a mid cap NBFC which finances transmission, distribution and power generation projects throughout India. So its business is like that of any other bank, maybe a PSU bank. But then, a PSU bank has a much wider spread of risk, REC's focus is only on power sector. Also, its lending is more to PSU units. As at 30th Sept 2009, 61% of its lending was to PSUs and 32% to private sector. Take a look at the financials of the company. For the past three quarters of the current fiscal, the company's growth has been flat. Its EPS for all the three quarters have been in a range of Rs.5.50 to Rs. 5.76 and since Q1FY10, the annualized EPS has remained stagnant at Rs.22. If we saw a vision of EPS of Rs.22 at the beginning of FY10, we see the same estimates even today. So if we talk about growth,it is missing sequentially in FY10. Its book value currently stands at Rs.90 and Price to Book Value at issue price of Rs. 203, is at 2.25.Even PE multiple of over 9 times at issue price is not leaving much room to rise, going ahead. As such, the investors right now, do not seem to have any appetite for PSU stocks, especially when all eyes are trained on the forthcoming Budget. The market as such is lukewarm and that will also keep the retail investors at bay.

RURAL ELECTRIFICATION CORP

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