Decent appreciation in the medium term
Power Grid Corporation Limited FPO has opened for subscription on Tuesday the 9th of November and would close on Thursday the 11th of November for QIB bidders and for all others on Friday the 12th of November.
| Price Band | Rs 85-90 |
| Employee and Retail Discount | Discount of 5% on the issue price at allocation |
| Issue Size | Rs 7155.03 crs at Rs 85 and Rs 7575.91 crs at Rs 90 |
| Market Capitalisation pre issue | Rs 39352.67 crs at Rs 85 and Rs 41,667.53 crs at Rs 90 |
| Fresh issue by the Company | 42,08,84,123 equity shares |
| Offer for sale by existing shareholders | 42,08,84,123 equity shares |
| Total Issue Size | 84,17,68,246 equity shares |
| Reservation for Employees | 33,89,600 equity shares |
| Net Issue Size | 83,83,78,646 equity Shares |
| QIBs | 41,91,89,323 equity shares |
| Non-Institutional Buyers | 12,57,56,797 equity shares |
| Retail Individual Bidders | 29,34,32,526 equity shares |
| Equity shares outstanding after the Issue | 462,97,25,353 equity shares |
| Market Capitalisation post issue | Rs 39352.67 crs at Rs 85 and Rs 41,667.53 crs at Rs 90 |
| Issue opens on | Tuesday, November 9th, 2010 |
| Issue closes for QIB’s on | Thursday, November 11th, 2010 |
| Issue closes for all other than QIB’s on | Friday, November 12th, 2010 |
| Book Running Lead Manager | SBI Capital Markets Limited |
| Goldman Sachs (India) Securities Private Limited | |
| ICICI Securities Limited | |
| J P Morgan India Private Limited | |
| Syndicate Members | SBICAP Securities Limited |
| India Infoline Limited | |
| IPO Grading | Listed entity – hence not applicable |
| Bidding Lot Size | 65 shares |
| Maximum Retail Bid in shares and amount | 1105 shares at Rs 90 Rs 99,450 |
| Discount to closing price on BSE as on 5th Nov | 11.76% at top end of Rs 90 compared to closing of Rs 102 |
Business
Power Grid is India’s principal electric power transmission company. The company owns 79,556 circuit kilometres of electrical transmission lines and 132 electrical substations. In the financial year ended March 2010, Power Grid transmitted 363.72 billion units of electricity, representing 47% of total power generated in India. The company operates on cost-plus-tariff based system and is provided a return on equity on pre-tax basis of 15.5%, to be grossed up by the normal tax rate as applicable for the respective year. In the current five year plan the company has already spent over Rs 29,100 crs and the same plan is to end on 31st March 2012.
Power Grid is the third largest transmission utility in the world and it owns and operates more than 95% of India’s interstate and inter-regional electric power transmission system. The growth in business opportunity is because of the huge requirement of power generation in the country to meet our energy requirements. The company has extensive experience in executing and implementing transmission projects.
The company is into the business of transmission and also does grid management. Because of its experience it provides consultancy to various state electricity boards and also internationally to countries like Afghanistan, Bangladesh, Sri Lanka, Nepal, Bhutan, UAE and Nigeria. The company also owns and operates optical ground wire network comprising of 20,733 kms of telecom network across 129 cities.
Objects of the Issue
| 1. | The object of the issue is to fund expenditure to meet the capital requirements for the implementation of the identified projects to the extent of Rs 3,800 crs. |
| 2. | Fund expenditure for general corporate purposes |
The details of the identified projects (thirteen projects) which need a total expenditure as of approved costs is approximately 24,030.08 crs. The revised cost of these projects as of 30th September 2010 is Rs 22,649.39 crs. As per the details given in the RHP all these 13 projects would be commissioned latest by December 2012.
Financials
The company reported a total revenue of Rs 6138.72 crs for the year ended March 2009 and Rs 7503.58 crs for the year ended March 2010. Revenue for the half year ended September 2010 was at Rs 4372.66 crs. The net profit after tax was Rs 1690.61 crs for March 2009, Rs 2040.94 crs for March 2010 and Rs 1354.58 crs for the half year ended September 2010.
In terms of EPS the company earned an EPS of Rs 4.03 for March 2009, Rs 4.85 for March 2010 and Rs 3.22 for the half year ended September 2010. If the results for the half year were to be annualised we are talking of a EPs of Rs 6.44 for the year ending March 2011.
Valuations
There are no comparables in the industry with which this company could be compared hence not done.
Growth Drivers
The biggest growth driver is the power generation which is to happen in the next couple of years and going forward. Power generation is coming up close to mines, ports and places where the consumption would not happen and therefore needs to be evacuated which becomes the job for Power Grid. This is a regulated business offering fixed returns and therefore the large investments required make this an ideal business for Power Grid. The company has performed very well on performance matrix and is earning bonuses for system uptime and reliability.
Consultancy is a growing business and the company undertakes turnkey projects for the SEB’s where it makes 15% as its fees. This is a steady and growing source of income. The company as of 30th September 2010 had 75 ongoing consultancy projects.
Valuation
Based on March 2010 earnings of Rs 4.85, the FPO at the upper price band is being offered at a PE multiple of 18.56 times while based on half year ended September 2010 annualised earnings of Rs 6.44 is being offered at a PE multiple of just under 14 times at 13.97 times. There will be a dilution of equity post he FPO which will increase the PE multiple to roughly 15.38 times. The company has a large work in progress and this converts to revenue generating assets as soon as they are ready. This would help in increasing earnings going forward.
Power Grid Corporation Limited went public by way of an offer for sale of 19,13,10,965 equity shares at a price of Rs 52 in September/October 2007. The earnings of the company in the year ended March 2008 were Rs 3.44 and that made the PE multiple at 15.12 times.
Effectively this means that shares of this company are being offered at a similar PE multiple as the original IPO three years after the company and stock performance is known to all.
Conclusion
The offer is attractive and offers value to investors. There is money to be made in the short term with roughly 40% allotment and a price of not less than Rs 98; one is talking of making between Rs 5000-5500 per application of Rs 1,00,000. This could change with subscription levels. In the medium term when results for March 2011 are available this stock could give a bigger upside as more projects get converted from work in progress to commercial assets.
I recommend the issue to investors.
SEBI Disclaimer: – I intend to subscribe to the above issue.
