Power Grid: Don't reach for panic button

Street finds it hard to digest scale of proposed equity dilution but observers feel this has been overdone

Power Grid took the market by surprise while unveiling its plan to raise funds through a new issue of equity shares. Its board has approved a follow-on public offer (FPO) equivalent to 15 per cent of its existing share capital or about 694.4 million shares. At the current price of Rs 93 a share, the issue size would be Rs 6,300 crore.

"Although the market was anticipating the equity dilution, the intensity was shocking. This is despite consistent maintenance by the management that the requirement of equity (dilution) can be avoided by taking a higher-than-normative proportion of debt," said Rabindra Nath Nayak of SBICAP Securities.

So, the dilution news led to an almost similar correction in Power Grid’s share price on Friday. In FY14, analysts are expecting earnings per share (EPS) of Rs 10.9. If one takes into account the impact of equity dilution, this could drop to about Rs 9.5. Apart from the earnings impact, the market believes the issue of new shares could come at a lower price or a discounted rate. This would encourage investors to sell existing shares, in the hope of buying these back at a lower price in the FPO.

A large part of the news about equity dilution is already priced in the share value and, hence, any further downside should be limited. Even after accounting for the expected dilution, the stock is currently trading at 9.6 times of FY14 adjusted estimated earnings. Additionally, due to the equity fund raising plans, the company’s book value is estimated to go up from Rs 63.8 to Rs 67.35 a share, a rise of almost six per cent. A higher book value should render support to its valuations.

More important, the funds being raised are for capital expenditure and to retire debt. The company is in the business of setting up and operating power transmission networks; it is currently the largest in the segment. As against its earlier estimate of Rs 1 lakh crore, the company intends to spend about Rs 1.1 lakh crore in the current five-year Plan to set up new transmission capacity, partly why it needs more funds. The fruits of this expansion will start reflecting in the company’s financials in the coming years. The gains should be reasonable, as the company’s return on equity consistently inched up over 2008-12, from 12 per cent to 15 per cent; it was 14.5 per cent in FY13.

"We believe the stock correction is overdone. In FY11, Power Grid had sold 20 per cent of its shares at Rs 90 each (the Nifty was around the same level then) and its EPS has grown at 23.9 per cent annually since then," said Amit Golechha who tracks the company at Emkay Global Financial Services.