REC: Going the NTPC way?

Investors should look at the stock with a long-term perspective, as big-ticket investments are planned in the power space.

The response to National Thermal Power Corporation’s (NTPC’s) follow-on public (FPO) offer was lukewarm at best. Lower investor participation was attributed to poor market conditions and the new French auction system. With Rural Electrification Corporation’s (REC’s) FPO open since February 19 and having being subscribed a mere 0.59 times (till Monday evening, according to bids at NSE and BSE), it seems that its FPO may go the NTPC way, or perhaps a little better. How it really fares will be known by Tuesday evening, when the offer closes.

The lukewarm response, so far, is despite the government modifying the rules slightly for achieving better subscription. Institutional bidders are now allowed to revise their bids in either direction. Secondly, the floor price was pegged at a relatively steeper discount of around 8 per cent (5 per cent in case of NTPC) to REC’s closing price (on BSE) a day before the announcement of the price.

Nevertheless, investors should look at REC with a long-term perspective. With big-ticket investments planned in the power space, the demand for funds is expected to remain high. REC expects to maintain higher margins (at around 4 per cent) on a consistent basis and expand its book by 22-24 per cent annually in the next two years. Its net profits are estimated to grow 20-25 per cent annually during this period.

Also, unlike in the case of NTPC, wherein all the FPO proceeds went to the government, REC would get most of the issue proceeds (75 per cent or about Rs 2,600 crore), which would be used for future growth.

Considering REC’s FPO price of Rs 203, the stock is available at a price/book value of 1.55 estimated 2010-11 numbers, which is at a reasonable discount to its larger peer, PFC (estimated at 1.9 times).

With inputs: Puneet Wadhwa & Sarath Chelluri