Power Grid FPO

PowerGrid is the only transmission player that may enjoy a scarcity premium in this business. However, returns may be moderate, given the defensive nature of the stock.

Investors with a three-four year horizon can consider subscribing to the follow-on public offer of Power Grid Corporation. PowerGrid, the central transmission utility, wheels more than half the total power generated by power utilities in India.




The issue size is Rs 8,400 crore (at current price) with part-disinvestment, part-fresh infusion. Out of the fresh equity proceeds (Rs 4,200 crore at current market price), around Rs 3,800 crore is to be deployed to fund the equity portion for 13 transmission projects which is expected to enhance the transmission network by 18,711 circuit km (ckm).

At Rs 102, the stock trades at 17.2 times its estimated FY-11 earnings and at 2.1 times its FY-11 book value. At this price-book value multiple, the stock is placed at a discount to NTPC (2.4 times book value) which though not similar, is its closest peer, thanks to the regulated nature of the business.

PowerGrid is the only transmission player which may enjoy a scarcity premium in this business. However, investors have to note that the returns may be moderate given the defensive nature of the stock. The beta of the stock is 0.7 and as the market is trading near all-time highs, exposure to this stock may protect investors from downside.

The company is a near-monopoly in the inter-state (regional) transmission of power and will continue to be a key beneficiary of the strong growth in power generation, given the uneven distribution of generation assets and rising demand across the country. Majority of the generation projects are coming up in the coal-rich States of Jharkhand, Chhattisgarh, Orissa and States with untapped hydro-power generation (Uttarkhand, North-east India).

Along with this, the capital spends on strengthening the existing system (to wheel more power for the given infrastructure) would help the company's earnings grow at higher than historical rate of growth (18 per cent annual growth over the last three years).

The regulated nature of the transmission business helps the company earn a steady post-tax return on equity of 15.5 per cent (additional 0.5 per cent for on-time commissioning) for its transmission assets. Almost all cost components, including depreciation, interest costs (inclusive of working capital) and operating expenses, are pass-through, thereby providing stable margins for the company. The company has strong operating efficiencies and is also leveraging on existing infrastructure for providing telecom and consultancy services.

Business

As of September 2010, PowerGrid had a transmission network of 79,556 circuit km (ckm) and 132 substations with capacity of 89,170 MVA. Its inter-regional transmission network stood at 22,400 MW (March 2010 end) which may go up to 37,000 MW by end of the 11th Plan (2012) and to 75,000 MW by end of 2017.

The company may add another 39,000 ckms during the current Plan which may support higher generation capacities.

The company planned to spend as much as Rs 55,000 crore in the Eleventh Plan of which 46 per cent was already spent as of March 2010. Majority of the debt funding is already arranged and the current FPO issue will aid the equity funding requirement.

Unlike its power generation counterparts, PowerGrid may not slip the capex target by a significant margin as a part of additional investments that have to be made during the current Plan are towards the strengthening/upgrading existing ageing infrastructure. While the company may be in a position to take care of the equity funding at 70:30 debt:equity mix for the next two-three years, another equity infusion may be required on a later date, given that additional Rs 1,00,000 crore of investments is expected to be done by the central transmission sector during the 12th Plan.

Currently 32 per cent of the fixed assets are in nature of capital work-in-progress which is not earning any return, thereby depressing the overall return on equity. ROE as on March 2010 stood at 12.83 per cent. This low profitability ratio may continue until back-ended projects over next two years are capitalised and start earning returns.

The strengthening of the transmission network and setting up more 765 KV lines and high voltage direct current lines will not only allow higher transmission but also reduce transmission losses, thereby improving efficiencies.

Financials

Revenues grew at an annual rate of 22 per cent over the three year period ending March 2010 Rs 7,503 crore while profit grew at 18 per cent to Rs 2040 crore. The EBIDTA margin of the company stood at 83 per cent for the year ended March 2010.

For the first half of September 2010, profits grew at 34 per cent, thanks to the implementation of new projects and higher income from consultancy, telecom and short-term open access. Short-term open access contracts give higher than regulated returns. As of September 2010 end, the debt-equity may fall to 1.7 from 2.1 post-capital raising

PowerGrid improved its share of power transmitted as a proportion of total power generated to 51 per cent during the first half of Sep 2010 from 47 per cent in FY10.

The company has maintained a 99.86 per cent availability during the first half and has been earning incentives due to higher operation availability. The company may also earn incentives (0.5 per cent) on the back of on-time commissioning of the transmission projects.

PowerGrid is diversifying its vendor base to reduce equipment delays. Add-on revenues from unregulated segments such as consultancy and telecommunication are in growth phase but continue to contribute only a small proportion of the revenues.

PGCIL's telecom network is currently 20,000 ckm.

Issue Details

The issue opens on November 9 2010 and closes on November 12 2010.

via BL