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Power Grid's FPO can deliver good returns

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Sound business model, good track record, healthy prospects and reasonable pricing make the issue attractive.

Generated power is of no use unless it is delivered to the consumer. Thus, like power generation, transmission and distribution (T&D) play an equally important role in the development of the power sector. Estimates suggest that for every Megawatt (Mw) of generation capacity that is installed, a similar amount is required towards setting up T&D infrastructure.

of India, which is majority owned by the government, in a span of two decades has emerged as the third largest transmission utility in the world — it currently enjoys a market share of over 50 per cent (in terms of power transmitted) in India. Considering its past track record, expertise, size, pool of resources and large opportunities in this space, analysts believe Power Grid should continue to grow at a rapid pace in the years to come.
 

STRONG CURRENT
In Rs crore FY10 FY11E FY12E FY13E
Revenue 7,127 9,125 11,183 13,327
Ebitda 5,893 7,767 9,622 11,532
PAT 2,303 2,625 3,278 3,743
NPM (%) 32.30 28.80 29.30 28.10
EPS (Rs) * 4.97 5.67 7.08 8.08
PE (x)  18.10 15.90 12.70 11.10
BV (Rs) * 42.54 48.21 55.29 63.37
P/BV (x) 2.12 1.87 1.63 1.42
*Based on the post-issue capital                                  Source: Analysts’ estimates

To partly meet its capital expenditure plans, the company has come out with a follow-on public offer (FPO) at a price band of Rs 85-90 per share. The offer, which provides a five per cent discount to retail investors, will help raise Rs 7,575 crore based on the upper price band, and includes an offer for sale worth Rs 3,787 crore by the government.
 

ISSUE DETAILS
Price band (Rs) 85-90*
Size (Rs cr) 7,155-7,575
Opened on 9-Nov
Closes on 12-Nov
* Excluding 5% discount to retail investors

Solid foundation
Apart from strong growth, the company’s business model too scores high. The company owns and operates about 79,556 circuit km of network and 132 sub-stations. These lines and sub-stations generate fixed income in the form of transmission income and rentals, which ensures a pre-tax return on equity of 15.5 per cent. In this context, the company has a stable business model which generates consistent cash flow irrespective of any increase in cost. The growth is primarily linked to the incremental capital expenditure of the business, which has been strong and should remain so given the huge capex required in the sector. The company has capex plans of Rs 55,000 crore in the current Five Year Plan ending 2012 and another of Rs 1,00,000 crore in the next Five Year Plan ending 2017 (see chart, PGCIL: Capex plans). This will continue to provide growth in revenue and profits over several years.

Leveraging to grow
The company is also leveraging its existing tower infrastructure to tap opportunities in the telecommunication segment. It plans to lease its tower infrastructure to telecom companies — a business that currently accounts for 2 per cent of its revenue. For now, the company has about 20,733-km of telecom network leased to major companies like Bharti Airtel, and Tata Communication.

The company is also providing consultancy services for similar projects in transmission, which forms almost 4 per cent of its total revenue. The company is currently involved in 12 international consultancy projects in countries like Afghanistan, Bangladesh, Nigeria, Bhutan, UAE, Sri Lanka and Nepal. Though the contribution from these segments is marginal, it has been growing and has helped in improving margins.

Investment rationale
On the back of its ongoing expansion plans, the company is expected to report over 20 per cent growth in revenue, and 18 per cent growth in net profits on an annual basis over the next three years.

Its stock is currently trading at about Rs 101, which is almost 18 per cent higher compared to the issue price of Rs 85.5 per share, which is after taking into account the 5 per cent discount on the upper price band of Rs 90.

Being a utility, analysts value the stock on the basis of price to book value (P/BV). If we assign, as most analysts suggest, a P/BV of two times its estimated book value of Rs 55 per share for 2011-12, the fair value of the stock works out in the region of Rs 110. This indicates an upside of about 28 per cent compared to the IPO pricing. Given the growth prospects, past track record, sound business model and attractive valuations, investors can subscribe to the FPO.

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