Invest in REC FPO
Investors can subscribe to the follow-on offer from Rural Electrification Corporation (REC), as the valuation at which the offer is made is reasonable in the light of the strong earnings visibility and growth expectations. REC, which specializes in financing power projects, is witnessing a huge and sustainable demand for funds, which would drive loan book growth for the next few years.
Superior net interest margins (NIM) of 4.54 per cent, despite secured lending, continue to aid profit growth. High return on net worth (21 per cent estimated for the fiscal ended March, 2010 despite equity expansion), low operating costs, high levels of capital to support the loan growth and near-zero non-performing assets are the key positives. At the offer price of Rs 203, the stock trades at nine times its estimated FY-11 EPS and 1.8 times its expected FY-11 adjusted book value. In book value terms, it is at a slight premium to its peer, Power Finance Corporation. A valuation of nine times earnings is cheap as the company may post an earnings growth of more than 30 per cent annually for the next three years.
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