REC

By Geetanjali Kedia

Introduction: Rural Electrification Corporation (REC) has entered the debt capital market on 28^th February 2014, for the second time this fiscal, with an issue of Tax Free Bonds of face value of Rs.1,000 each, in the nature of Secured Redeemable Non Convertible Debentures.

Issue Details: Issue, closing on 14^th March, has a size of Rs.250 crore, with an option to retain an oversubscription of Rs.809.4 crore, aggregating upto Rs. 1,059.4 crore. Minimum application is Rs. 5,000 and in multiples of Rs. 1,000 thereafter, while allotment will be done on first come first serve basis. Being tax-free, the interest does not attract TDS nor do the bonds attract wealth tax.

Rating: Highest credit rating of AAA by CRISIL, CARE, India Ratings and ICRA, indicating highest degree of safety regarding timely servicing of financial obligations.

Listing: Bonds, proposed to be listed on BSE and NSE, are to be issued both in physical and dematerialized form, hence a demat account is not necessary to buy these bonds. Also, the bonds do not have any lock-in period.

What’s on offer: Bonds have three different series under which they are being offered:

*Retail investors defined as application upto Rs. 10 lakh from resident individuals, HUF, NRIs and QFIs being individual. 40% of the issue is reserved for retail category, 25% each for corporates and HNIs (over Rs. 10 lakh) and balance 10% for institutions.  

Company Background: A Navratna central PSU, REC provides interest bearing loans to state electricity boards (SEBs), power utilities and private sector for all segments of power infrastructure. In FY13, it posted topline of Rs. 13,526 crore and PAT of Rs. 3,833 crore, on networth of Rs. 17,529 crore. Earning NIMs of 4.70% in FY13, its loan book totaled Rs. 1.27 lakh crore, up 26% YoY. For 9MFY14, the company continued with its robust financial performance with revenue of Rs. 12,565 crore and PAT of Rs. 3,492 crore. Its current market cap stands at close to Rs. 18,700 crore. Thus, the company is financially sound and secure.

Rate of Return: The 15 year (Series 2) bonds, carrying the highest coupon rate, are comparable to a 12.85% pre-tax return earned on other fixed income instruments, assuming the highest tax bracket of 30.9% for retail individuals. This is very attractive rate as currently no bank is offering double digit interest rates on long term deposits.

REC is offering 8.88% pa coupon for both 15 year period. Although the current offering is 17 basis points higher than its September issue from the same company (8.71% offered for 15 years), it is lower than HUDCO’s AA+ rated bond issue currently open, wherein 15 year is offering a coupon of 8.98%, a good 10 basis points higher for the slightly lower rating. However, being PSUs, AAA and AA+ ratings do not have a material difference between them, making HUDCO issue more preferable.

Recommendation: Since the coupon rates are lower vis-a-vis HUDCO bonds, the latter is better. Pick HUDCO!