REC shares dip over FPO pricing worries

Shares of the Rural Electrification Corporation (REC) fell on Thursday, a day after the government set the floor price of the follow-on-public offer (FPO) at Rs 203 per share.

Contrary to reports that the issue would be priced at a sizeable discount to the market price, the offer has been priced similar to that of the National Thermal Power Corporation (NTPC). The NTPC issue got a tepid response from retail investors. The fall was being looked at as a thumbs-down to the issue price, said market players.

The stock opened the day at Rs 210, before losing further ground. During the trading session, the stock came close to the FPO price, falling to the day’s low of Rs 205.15, down nearly 7 per cent from its previous close of Rs 220.15. The shares finally closed at Rs 214.25, down Rs 5.90, or 2.68 per cent. The stock futures of REC for February series closed at a discount to the cash market at Rs 212.85.

The enhanced investor activity was corroborated by the fact that volumes registered a significant spurt. On the Bombay Stock Exchange (BSE), 854,000 shares changed hands, more than double the Wednesday’s figure. On the National Stock Exchange (NSE), 3.2 million shares were traded. The open interest in the REC stock futures for February expiry rose over 8 per cent.

Prithvi Haldea, managing director, Prime Database said the government’s approach towards pricing public sector issues was defeating the purpose of these FPOs. “The whole purpose is more retail participation. Otherwise, the company can go for a qualified institutional placment or a preferential allotment,” he said.

Haldea added the REC FPO might go the NTPC way, as “the discount offered is insignificant and the difference, too, might be wiped off if the market falls further”.

Interestingly, investment bankers say the price is attractive. Anyone with a long term view will invest, they say.

“The share price will move in line with the stock market. We expect good response from retail investors, as REC has a compelling business case,” said Brijesh Mehra, country corporate & investment bank head, RBS Equities, which is one of the book running lead managers for the issue.

Asked about the incentive for retail investors, especially after the NTPC episode, Mehra pointed at the “long-term value” of the stock.

The NTPC FPO, which kick-started the divestment process, saw retail investors giving it a cold shoulder, as the issue was priced at Rs 201 at a time when the shares were trading around Rs 210. While the issue was subscribed 1.2 times, retail portion remained under subscribed. The institutional segment saw huge bids by state-owned entities, including LIC and SBI.

There is, however, a section of market participants that believes the issue will fare better than NTPC. “Retail participation in REC will be better than some of the earlier issues,” says Arun Kejriwal, Director KRIS Research. “The price, as expected, did register a sharp dip, but also managed to improve considerably,” said Kejriwal.