Price band: 90-105

Face Value: 10

Issue size (in value): 1,405 - 1,639 crore

The Indian government has an objective of achieving “Power for all by 2012”. The development of the power sector has traditionally been the responsibility of the government through the central and state utilities, with a relatively insignificant contribution by the private sector. In order to reduce the gap between supply and demand, the Indian government formulated policies in 1991 for increasing the role of the private sector in the power sector of the country. The 1991 policies have been revised and modified through enactment of the Electricity Act 2003 (the “Electricity Act”). 

To improve the distribution of power and accelerate the distribution of power reforms, in March 2003 the Government of India formulated the APDRP. The objectives of this programme are to improve the financial viability of state power utilities, reduce aggregate technical and commercial losses, improve customer satisfaction and increase the reliability and quality of the power supply by reducing outages and interruptions. Government of Indiaseeks to reform the power distribution sector by providing investment and incentives to SEBs and SPUs and distribution companies to strengthen and improve sub-transmission systems and distribution networks. Under APDRP, the government provides funds as additional assistance in form of grants to states that have committed themselves to a time-bound programme of reforms. The additional funds allocated to SEBs and SPUs are to be utilized for upgrading and modernizing certain sub-transmission and distribution networks.

Rural Electrification Corporation (REC) was incorporated on July 25, 1969 under the Companies Act 1956. REC is a wholly owned Government of India Public Sector Enterprise with a net worth of 3779 Crore. Its main objective is to finance and promote rural electrification projects all over the country. It provides financial assistance to State Electricity Boards, State Government Departments and Rural Electric Cooperatives for rural electrification projects as are sponsored by them. The company provides funding to its clients and assists them in formulating and implementing various types of power project related schemes. REC’s clients include public sector power utilities at the central and state levels and private sector power utilities. Additionally, they fund power projects for their joint sector clients. REC’s financial products primarily include long-term loans, short-term loans, bridge loans and debt refinancing. Rural Electrification Corporation occupy a unique position within the area of rural electrification of India and the company believe that they will continue to play an integral role in implementing the government’s rural electrification strategy. ECB currently administer grants and provide loans as the nodal agency for the RGGVY, which is primarily aimed at the electrification of all villages in India .

Objects of the Issue:

Rural Electrification Corporation (REC) intends to use the issue proceeds of 1,405-1,639 crore for augmenting its capital base to meet future capital requirements arising out of its business growth and for other general corporate purposes.

REC along with PFC is the pioneers in the business of power sector financing in the country. The business of the company can be strictly comparable with that of PFC as both have same kind of shareholding pattern and business activity. But in terms of loan exposure REC has considerable exposure to T&D sector as against PFC’s considerable exposure to the generation segment. In T&D segment the loan repayment period is relatively lower as compared to the generation projects. But recently the disbursement by REC to the generation projects has witnessed a spike due to increased activity in the generation activity in the country. However the T&D sector will continue to dominate in the asset composition of the company in the long run. At the higher and lower price band the issue is priced at 2x and 1.8x to book values based on FY07 financials. The TTM P/BV of PFC stands at 1.9. Therefore we recommend investors to subscribe to the issue at the higher price band of the issue price.

• Concentration Risks: The Company exclusively focuses on power projects and related activities and intends to continue to be a sector specific public financial institution with a focus on Indian power sector. The power projects involve project specific and general risks against its exposure to single borrower and borrower groups remain significantly high. Any negative trends or financial difficulties in the Indian power sector could adversely affect its business and financial performance.
• Potential difficulties in recoveries: As discussed previously, REC's clientele primarily consists of state electricity boards and other public sector entities. The heavily skewed loan portfolio towards entities, which have been making losses for past many years, raises concerns regarding the recovery of debt. Currently, the asset quality of the company is quite healthy, but there exists an uncertainty over REC's ability to maintain the asset quality at current levels