PowerGrid: After FPO, expect gains

Before news of FPO, Power Grid's share prices were trading at around Rs 100-130 a share

With the long-awaited follow-on public offer (FPO) of PowerGrid open, it is good news for investors as its overhang will soon be behind. Also, it would enhance the company’s coffers that will help fund projects.

The news about the FPO had seen the stock come under pressure, making valuations attractive. Before the news of the FPO, the share was trading at Rs 100-120.

Even as the issue will mean an increase in supply in the counter, experts say most investors, including institutional, are looking to subscribe to the FPO, given its attractive pricing, lower than the market price of Rs 93.4. For retail investors, the FPO is more attractive, given the discount of Rs 4.5 a share, or five per cent on the upper band of the offer price of Rs 85-90 a share. Not only from the perspective of historical prices, if one looks at the valuations at the offer price, there is enough room for gains.

"With the overhang of FPO behind us, the risk to valuations is mitigated. The current valuation has an upside potential owing to the stable business model," says Misal Singh of Religare Capital.

Through the FPO, the government is looking to divest four per cent from its holding of 69.42 per cent. PowerGrid will be issuing 602 million shares. With the divestment, it totals 17 per cent of the share capital. The issue will lead to 13 per cent dilution in earnings. Nevertheless, even after taking that into account, the FPO price is valued at just 1.1 times its book value at the lower end of the price band and the dividend yield works out to four per cent, both attractive for a company with a stable business model (among utilities) and consistently generating cash. Even after considering the impact of the issue, the return on equity (RoE) for the core business is estimated at 17 per cent.

The proceeds of the issue, Rs 4,600 crore, will be used to fund the equity portion in 27 projects and lowering debt-equity ratio. Though the gains in earnings may not reflect immediately, but as the money is deployed in the projects, its impact will be visible from FY15 in the form of higher capitalisations.

"PowerGrid has been able to achieve 95 per cent execution rates and we expect the capital expenditure to be capitalised at a faster rate resulting in higher earnings due to increased commissioning of projects. We expect the net sales to see 21 per cent growth annually in FY13-15 on higher capitalisation, and the net profit to rise 14.5 per cent annually," says Rupesh Sankhe of Karvy Stock Broking.