State-run Rural Electrification Corporation (REC), one of the leading non–banking public financial institutions (NBFC) in Indian power infrastructure will launch its follow-on-public issue consisting of 1,717 million shares tomorrow. The company has set a floor price of Rs 203 a share for qualified institutional buyers (QIB`s).

The price is at a discount of a 7.5%, to Wednesday`s (Feb.17, 2010) closing price of Rs 220 a share.

Shares of the company declined Rs 5.9, or 2.68%, to settle at Rs 214.25. The total volume of shares traded was 854,125 at the BSE (Thursday).

Kotak Mahindra Capital Company, DSP Merrill Lynch, ICICI Securities, JM Financial Consultants (P), RBS Equities (India) are helping the company in the fund raising process.

Valuation according to brokerage house SMC Research:

The stock trades at a P/BV of 2.03x times on its floor price of Rs. 203 for quarter ending Dec`09 book value Rs.100.13. Looking at the post issue valuation, the stock trades at a P/BV of 1.79x times on its floor price of Rs 203 post issue book value of Rs.113.52.

Considering the P/E valuation, the company is trading at a P/E of 9.53x times on the floor price of its TTM Dec`09 earnings of Rs.21.29. Looking at post issue valuation; the company is trading at a P/E of 10.96x times on the floor price of its post issue TTM Dec`09 earnings of Rs 18.51.

Myiris has collated views of analysts on whether or investors should invest in the FPO:

Aditya Birla Money:

The justifications for investments is provided as under:

Investment Rationale: Healthy Industrial Outlook:

The power industry in India has historically been characterized by energy shortages. In the period from April 2009 to January 2010, peak energy deficit was estimated at 12.6% and normative energy deficit was estimated at 9.9%. The gap between demand and supply is increasing, leading to increase in power shortage.

Over the long term, the per capita energy consumption in India is bound to increase, which is currently significantly lower than world average. Power sector is one of the key constituents of infrastructure required for overall growth of the economy. With the outlook for Indian economy remaining bright, the power sector is likely to scale new highs in the coming years.

SMC Research:

The investment rationale is as under:

Government of India (GoI) supports REC (Q,N,C,F)* in multiple ways such as grants & interest subsidies channeled through REC reduces the overall cost of projects funded through loans from REC.

Moreover, REC is supported in its debt mobilization by the tax concessions which are available on the bonds issued by REC and GoI guarantees. The availability of tax concessions helps REC in reducing its average cost of borrowing. Though the company enjoys some benefits over its peers due to tax incentive support from the government, but its key risk emanates from its exposure to a single industry with relatively weak borrower credit worthiness.

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