| Power Grid Corporation is a great proxy to India’s power sector. Long-term investors can subscribe to its IPO. One of the best depictions of India’s power shortage was in the movie Swades. The residents of a village, who didn’t know what electricity was, assist actor Shah Rukh Khan to create a small power generation unit. The expression of curiosity on the old lady’s face before the bulb is lit and the 100-watt gleam on her face after the illumination is something that still needs to reach many parts of the country. |
| This is better understood with statistics–we have one of the lowest per capita consumption of power. Besides domestic electrification, there is a huge demand for power from the industrial sector. And that is why the government is investing directly or encouraging private sector investments in power generation capacities. |
| Power transmission is the next step after generation, as the power needs to reach consumers. If new generation capacity is being set up, there is a need to transmit and distribute that capacity. Thus, companies operating in the generation sector will benefit. |
| The IPO |
| Power Grid Corporation of India, the largest player in the power transmission sector, is coming out with an initial public offer of Rs 2,525-2,984 crore at a price band of Rs 44-52 per share. Like NTPC, Power Grid is a great proxy to India’s growing power sector. Its strong business model, operational efficiency and tariff based on assured returns on equity provide stable revenues and low risk. Besides, its huge future investment in the transmission sector will ensure long-term earnings growth. |
| “We think it is a good play on the growing power sector. The company is building about 31,000 km of transmission lines over the next five years. Compare this to the 68,000 km built over the last 60 years, and the number appears huge,” says Jigar Shah, director, KR Choksey. |
| Power generated at a plant is transmitted to a sub-station near a populated area. Due to the large amount of power involved, transmission normally takes place at high voltage (132 kV or above). Over a long distance, electricity is usually transmitted through overhead power transmission lines. |
| The company was incorporated in 1989 as a result of a government decision to form a national power grid. It managed the transmission assets of NTPC, National Hydro Electric, North-Eastern Electric and Neyveli Lignite till 1993, when these assets were transferred to Power Grid. Today, it owns and operates most of India’s inter-state and inter-regional electric power transmission networks—i.e from power plants to substations. |
| Power Grid generates about 90 per cent of its total income from transmission business. The company owns and operates 61,875 circuit km (ckm) of electrical transmission lines and 106 sub-stations. During FY07, the company transmitted about 298 billion units of electricity, representing about 45 per cent of all the power generated in India. |
| Sound business model |
| Power Grid has a strong business model with its transmission business providing stable returns with low risks. Central Electricity Regulatory Commission (CERC), which determines the tariff for the company, has stipulated an assured cost-plus-14 per cent return on equity. Besides, on the operational front, Power Grid has maintained an average system availability of above 99 per cent since FY02, leading to higher income under the incentive-based tariff structure. |
| Around 80 per cent of its revenue comes from the public sector state utilities, many of which have defaulted in the past. The company says about 105 per cent of the receivables are backed by letters of credit, and says that it manages to collect 100 per cent of receivables on a timely basis at present. Despite these measures, if state electricity boards default in future, the company could lose some money. Also, state electricity boards are in better financial health than in the past, so this risk is not too different today than in any other business. |
| Power-packed growth |
| With a large share in the transmission industry coupled with the expertise and operational efficiency, Power Grid has an important role to play in India’s growing power sector. Considering the growing economy this gap is further widening. India’s power generation capacity increased from 105,046 MW in FY02 to 132,329 MW during FY07 and is expected to reach 219,992 MW by FY12. This will also require large investments in power transmission for laying transmission lines across the country and inter-regional lines to facilitate distribution and ultimately providing power to consumers. |
| The Eleventh Five Year Plan emphasises the enhancement of the national grid in a phased manner to increase the inter-regional power transmission capacity from 14,100 MW to 37,150 MW by FY12. This envisages an investment of Rs 1.4 lakh crore in the transmission sector in the Eleventh Plan. Power Grid targets an investment of Rs 55,000 crore as part of this plan till FY12. |
| Mega expansion |
| Over the past four years, Power Grid has made a capital expenditure of Rs 18,248 crore. As on June 2007, the company had 45 transmission projects at various stages of development totaling to an investment of Rs 27,291 crore. These projects involve 30,536 ckm of transmission lines, which is 50 per cent higher than its existing capacity, as well as new substation capacities. The ongoing projects are scheduled to be completed by June 2009. |
| The successful implementation of these projects on schedule will translate into a total transformation capacity of 90,727 MVA (mega volt-ampere) by June 2009. Considering the FY07 realisation of about Rs 5.46 lakh per transmission MVA, the increased capacity has the potential of providing revenues of Rs 4,959 crore on completion, or 43.5 per cent higher than FY07 transmission revenues. |
| Consulting gain |
| Besides, the company is also leveraging its capability and understanding of the transmission industry to diversify into the consultancy business. This accounted for 6 per cent of its FY07 total income and grew 46 per cent over previous year. Since 1995, this division has provided transmission-related consultancy services to over 90 clients involving about 200 domestic and international projects. |
| The company also facilitates the implementation of various government-funded projects for the distribution of electricity to end-users, such as the Accelerated Power Development and Reform Programme (APDRP) in urban and semi-urban areas and the Rajiv Gandhi Grameen Vidhyutikaran Yojana (RGGVY) in rural areas. |
| Telecom |
| With its own overhead transmission infrastructure in place, the next logical step for Power Grid was to create a fibre optic cable network on this backbone. The company owns and operates a fibre optic cable network of over 19,000 km and connects over 60 Indian cities. The company leases bandwidth on this network to more than 60 customers, including major telecom operators such as BSNL, VSNL, Tata Teleservices, Reliance Communications and Bharti Airtel. This is the fastest growing business; it grew 106 per cent in FY07 y-o-y to Rs 77 crore. Since this business is new, it made losses till FY07 but has good potential. “We expect the trend to change from FY08 as the initial investment stage is over,” says, Misal Singh, analyst, Edelweiss Securities. |
| Valuations |
| At the lower end of the price band of Rs 44, Power Grid is priced at 1.3 times estimated FY08 book value and 1.2 times FY09 book value. At the upper end of Rs 52, the issue will be priced at 1.55 times estimated FY08 book value and 1.5 times FY09 book value. |
| Compared with the price-book value ratios of NTPC, Tata Power and Reliance Energy, which are trading at well above two times FY08E book value, Power Grid is cheaper. While valuing the company, some analysts also use the discounted cash flow approach. “We have a DCF value of Rs 62, which is 20 per cent higher then the price at the upper band” adds Edelweiss Securities’ Singh. Based on the price-earnings multiple, the issue is priced at 13-15 times FY08 and 9-11 times FY09 fully diluted estimated earnings. Power Grid provides a good opportunity for investors to capitalise on the infrastructure growth story. |
| Issue opens: September 10 Issue closes: September 13 |