After a stunning performance by Coal India Limited on debut on the 4^th of November where the share shot up from an issue price of Rs 245 and gained 40% to close at Rs 342.35, the EGOM would now be worried about the right pricing of Power Grid. The issue size of Power Grid is large and is for a total of 84,17,68,246 equity shares which comprises of a fresh issue of 42,08,84,123 shares and an offer for sale of 42,08,84,123 equity shares. The issue opens from Tuesday the 9^th of November and closes for QIB bidders on Thursday the 11^th of November and for all other bidders on Friday the 12^th of November. With the returns on Coal India expectations of the investors and the government have both gone up. The expectations need to be met and the divestment programme needs to be given the momentum push forward.

There have been 4 FPO’s or follow on public offers since February 2010 so far. These issues have been NTPC, REC, NMDC and Engineers India. The first two issues namely NTPC and REC followed the French Auction route where the floor price is fixed and there is no upper band. This was a new experiment in India and it did not do too well and was scrapped after these two issues. Retail investors were not given the customary discount of 5% as well. In NMDC the old system was reintroduced and the 5% discount also given to retail investors. Engineers India was the star performer in the FPO table. The issue was subscribed an overall of 13.36 times with even the retail portion subscribed almost 3 times at 2.99 times. What was the reason for the success of this issue? The simple answer to this complex question is the discount which was offered to the market price on the day of deciding the price. The market price was Rs 337.65 and the top band was fixed at Rs 290 with a discount of 5% to retail. This implied that the retail would get a margin of Rs 62 on the day of subscription and assuming that as a result of the FPO the price came down by Rs 25 also, he still made a profit of Rs 37. This gave a great comfort to retail investors and they whole heartedly supported the share issue.

Of the four issues investors made excellent money in REC in the short term and medium term and also made money in Engineers India. In the case of NTPC and NMDC even today they are losing money on the FPO price.

Coming to the issue of Power Grid Corporation which opens on Tuesday the 9^th of November, the price band fixed would have to appear as an advertisement in newspapers on Monday morning. This means that the basis of price would be the close of price as of Friday the 5^th of November which was Rs 102. From the price chart given below one would observe that over the last 14 months the share has been in a narrow band with Rs 100 being a support and Rs 115 being a resistance on four occasions. The share briefly crossed the level of 115 and touched Rs 121.35 in mid January 2010. If one were to look at the performance of the BSESENSEX the same has gained from 17,464.81 points as of 31^st December 2009 to Diwali Muhurat day closing of 21,004.96, a total of 3,540.15 points or 20.27%. Power Grid on the other hand has lost value in the same period falling from Rs 110.10 on 31^st December 2009 to Rs 102 yesterday. The share has lost Rs 8.10 or 7.36%. Power Grid is also traded in the Futures and options segment and the total open interest in the same as of 4^th November is Rs 383.34 crs. The market capitalization of the company is Rs 42,635.55 crs as of the same date implying that the open interest is less than even 1% of the market cap. This would confirm that there has been no build up of short positions on expectation of the FPO issue from Power Grid.

BSE price chart since Aug 09

The company 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 31^st March 2012. The idea of giving these basic facts and figures is that this business is regulated has a steady rate of return and the company does not have too many surprises whether positive or negative. Because of this nature the speculative element is missing from the share. Pricing of the same becomes a concern.

The financials of the company are decent and the company earned an EPS of Rs 4.02 for the year ended March 2009, Rs 4.85 for the year ended March 2010 and Rs 3.22 for the half year ended September 2010-2011 or Rs 6.44 on an annualised basis. The share based on historical earnings of March 10 trades at a price earnings multiple of 21.03 times and without considering the 10% dilution post FPO at 15.83 times based on September 2010 half yearly annualised numbers.

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.

What could be a good price which ensures participation from all categories of investors as the success of this issue is vital as the government divestment programme is in full swing with Manganese Ore, Shipping Corporation and Hindustan Copper all slated before December 2010. Looking at the previous discounts to market price on day of announcing price band, a discount of anything between 14.5% to 16.5% is likely to be in order. Looking at the closing price of Rs 102 this would imply a discount of Rs 13 to Rs 14 at the upper end of the price band. I believe that if one looks at a top end price of Rs 88 or Rs 89 we are talking of a discount of 14.61% at Rs 89 and at Rs 88 a discount of 15.9%. The PE multiple based at this price on September 2010 earnings annualised and considering the dilution of 10% in equity would be at 15.04 times at Rs 88 and at 15.21 times at Rs 89. Even at a price of Rs 88 the issue size becomes Rs 7500 crs.

I believe it is in the interest of the market and the government who has huge divestment plans to keep the momentum going and sacrifice that extra rupee or two and ensure over subscription.