February has been a nightmare for the Indian primary market. From IPOs getting pulled out, issues not getting subscribed despite lowered price bands, deferred IPOs and disastrous listings, we have seen it all. Under such terrible conditions, it's refreshing to see a well priced IPO come through, with a reasonable chance of getting fairly oversubscribed.
Interestingly, Rural Electrification Corporation (REC) comes from the government stable and with the exception of Isec, does not have the privilege of being stewarded by any of the top five "blue blooded" investment banks.
REC, like it's primary market predecessor, PFC is a power sector financier. It has a reasonable track record and a healthy Return on Equity (RoE) of 20%. There are question marks over how it will access low cost funds to grow in the future as avenues such as 54EC bonds and ECBs may no longer be available. REC will have to find a way around these funding constraints. It is perhaps in recognition of these risks that the company has left enough on the table for investors.
On FY09 numbers, REC - at the higher end of it's price band of 105, comes at a Price to book (P/BV) of around 1.3 and a PE multiple of 7 times. That's a good deal. If , because of market conditions, they choose to do it around the lower end of the band, ie 90 rupees, even better. Sure, it may not be the best stock in this sector but at least it is not ridiculously priced like many of it's peers. Retail and HNI participation so far, has been expectedly lukewarm, but my guess is it's tough to lose money from this price point. Any post listing fall below issue price would have to be a temporary aberration.
We need more RECs to revive the sagging primary market. Well priced IPO with a considerable margin of safety for new investors. At the start of 2008, several billion dollars of IPOs were slated to hit the market in the first quarter. Now, things are a bit different. I doubt if even half of that will see the light of day and the ones that do will have to rework their price bands significantly southward.
That is, if they don't want egg on their faces. All this is good in a way. First you won't have the primary market crowding out secondary market liquidity as may have been the case earlier and we may avert the distinct possibility of IPO market excesses heralding the end of this leg of the bull run. As has happened in the past.
(Udayan Mukherjee is an Executive Editor, CNBC-TV18)