Power Grid Corporation of India

Power Grid Corporation of India (PGCIL), a navaratna public sector undertaking under the ministry of power, is the country's central transmission utility (CTU). The company owns and operates more than 90% of India's inter-state and interregional electric power transmission systems (ISTS). As principal electric power-transmission company of the country, it owns and operates 102109 circuit kilometers of electrical transmission lines and 172 electrical substations with a total transformation capacity of 172378 MVA as end of Sep 30, 2013.

As central transmission utility of the country, PGCIL is responsible for the planning and development of the country's ISTS network. As CTU it also required to facilitate non-discriminatory open access to available capacity in the ISTS and carry out real time grid management functions through its wholly owned subsidiary Power System Operation Corporation (POSOCO).

PGCIL was entrusted by GoI with the further responsibility of controlling the existing load despatch centres in the country in 1994, with a view to achieve better grid management and operation. Pursuant to this decision, the control of the five regional load despatch and communication centres (RLDC) was transferred to the company in a phased manner between 1994 and 1996.

As the RLDC operator, the company has modernized the regional and state load despatch centers and their communication networks. In Fiscal 2009, the National Load Despatch Centre (NLDC) was established. The NLDC is responsible for monitoring the operations and grid security of the national grid and supervises the scheduling and despatch of electricity over inter-regional lines in coordination with the RLDCs. All bilateral transactions are undertaken through the RLDCs, while transactions facilitated by the power exchanges are undertaken by NLDC.

POSOCO, a wholly owned subsidiary of the company was established in March 2009 to oversee the grid management function of the RLDCs and NLDC. Accordingly, RLDC and NLDC have been transferred to POSOCO and are in operation under POSOCI since Oct 1, 2010. The fees generated from the RLDC and NLDC operations are determined by Central Electricity Regulatory commission (CERC) in accordance with the Electricity Act and CERC (Fees & Charges of RLDC and related maters) Regulations, 2009.

The company leveraging its strength as India's principal power transmission company has diversified into the consultancy business. Since Fiscal 1995, PGCIL's consultancy division has provided transmission related consultancy services to over 160 clients (including 22 international clients) in over 460 domestic and 55 international projects. As at Sep 30, 2013, the company is engaged in providing consultancy services to clients in 116 domestic and 20 international projects. In its consultancy role, the company has been facilitating the implementation of the GOI funded projects for the distribution of electricity to end users through the Rajiv Gandhi
Grameen Vidyutikaran Yojana (RGGVY) in rural areas. Recently the company signed agreements with six north eastern states of Assam, Meghalaya, Mizoram, Manipur, Nagaland and Tripura to provide consultancy services as ‘Design cum implementation supervision consultant' for implementation of ‘North Eastern Region Power System improvement project', which was funded by World Bank.

Similarly the company has diversified into the telecommunications business in 2001 by leveraging/ utilizing of its nationwide transmission system to create an overhead fibre-optic telecommunication cable network using optical ground wire on power transmission lines. As at September 30, 2013, the network consisted of 29279 kilometers and connected 290 Indian cities, including all major metropolitan areas. It's one of few providers of telecommunication infrastructure with significant presence in remote and rural areas. As of Sep 30, 2013, the company has been leasing bandwidth on this network to more than 106 customers.

As end of September 30, 2013, the company had 86 ongoing transmission projects in various stages of implementation. The Board of Directors of the company have budgeted an investment of Rs 1,00,000 crore in transmission projects during the Twelfth Five Year Plan (April 1, 2012 - March 31, 2017). The investment target for 12th plan was further revised to Rs 1,09,680 crore to include new initiatives such as green corridors for renewable energy integration and projects under TBCB route. The Twelfth Five Year Plan aims to achieve a national power grid with inter-regional power transfer capacity of approximately 65550 MW, which would primarily include the transmission system of PGCIL. The projects in PGCIL's portfolio is largely been funded in part by loans from The World Bank, The International Finance Corporation and The ADB, thereby availing loans at lower interest rates compared to domestic financing costs.

The company has also entered into intra-state transmission by entering into joint venture with state transmission companies from the State of Bihar and State of Odisha. The estimated cost of these projects is Rs 6300 crore and Rs 2490 crore, respectively. It has also approached the Odisha Electricity Regulatory Commission to invest in high temperature distribution system and have made an application in October, 2012 for a licence to participate in the distribution wire business in Central Electricity Supply Utility area of Odisha.

It has also developed a comprehensive master plan for grid integration of renewable energy capacity addition in Twelfth Five Year plan across India through Green Energy Corridors. The master plan was released by the Ministry of Power and the Ministry of New and Renewable Energy. Further, it has also signed MOU with Nalco for conductors and RINL/SAIL for transmission towers albeit at smaller level.

Given its expertise and being CTU, the company is facilitating indigenous development and field testing of 1200 kV ultra high voltage alternating current (UHVAC) transmission system by establishing a 1200 kV National Test Station at Bina, Madhya Pradesh, parts of which achieved successful test charging in January, February, May and October 2012.

While the proceeds from issue of sale will go to GoI, the proceeds from issue of fresh shares to the tune of Rs 4600 crore will be used to fund the capital requirements of 27 identified transmission projects.

Strengths

PGCIL has grown revenues and profits consistently over the past many years. Its CAGR in revenues and net profit over the past 5 years is around 20%. The consistent growth ahs been achieved in spite of many issues plaguing power sector and rather hostile environment in power sector in the past few years.

As transmission utility the company charges the customers a transmission charge for recovery of annual fixed cost consisting of components: return on equity, interest on outstanding debt, depreciation, operation and maintenance expenditure and interest on working capital. The return on equity is on pre-tax basis at the base rate of 15.5% grossing up the base rate for the tax factor. In addition to 15.5% ROE, the company is also eligible for incentives for completion of project within timeline, availability of transmission network above specified levels. Thus the core transmission business revenue and profits are steady with low volatility.

Operation parameters of the company's transmission systems are very high with high availability rate and lower tripping per line. In the last five years the availability of the transmission system of the company is over 99.5%. Similarly the trip per line (T/L^2) is coming down from about 2.56 in 2009 to about 0.58 in 2013. Pursuant to 2010-14 CERC Regulations the company is entitled to earn an additional return on equity under availability based incentive mechanism.

Long time expertise in conceptualizing, planning and implementation of ISTS projects gives the company a clear edge compared to new entrants under tariff based competitive bidding (TBCB) mechanism, who are largely with little experience in managing long distance projects involving difficult terrains.

The company consistently achieved and exceeded its capital expenditure targets set under the 11th plan period. The company achieved a capex of Rs 17814 crore and Rs 20037 crore for FY2011-12 and FY2012-13 respectively against a target of Rs 17700 crore and Rs 20000 crore. For the six months ended Sep 2013, the company incurred a capex of Rs 10894.59 crore against a full year target of Rs 22150 crore. Moreover the capitalization to capex rate was as high as 59.5% and 73.2% and 85.9% in the last three fiscal of FY11, FY12 and FY13. Capital work-in-progress as of September 30, 2013 stood at Rs 24759.84 crore.

As the growth of core transmission business revenue and profits is largely linked to capacity addition plans and accelerated pace of capitalization given steady stream of revenue, the company has budgeted an investment of Rs 1,09,680 crore during 12th five year plan. This is all likely to take care of the future growth of the company. The company targets a capex of Rs 22150 crore in FY14, Rs 22450 crore in FY15 and Rs 22500 crore in FY16 and Rs 22550 crore in FY17.

Effective Jan 6, 2011 though all transmission projects except some identified projects are to be awarded under tariff based competitive bidding (TBCB) route the company being the Central Transmission Utility (CTU) of the country is to get identified projects for execution on nomination/assigned basis. Typically the identified projects are those which need to be completed urgently or of complex in nature such as 1200 KV Transmission Lines etc. CERC in May 2010 and Dec 2011 has approved high-capacity power transmission corridors totaling 11 in numbers at a total estimated cost of Rs 75,180 crore and majority of these projects are implemented by the company.

Weaknesses

SEBs/State power utilities are the largest customers of the company. Given their past track record of long outstanding receivables, the payment may get delayed leading to mounting of receivables even though the states are taking efforts to improve their financial position with recent tariff hike and making use of financial restructuring plan announced by Government of India in 2012-13. The company had trade receivables and unbilled debtors to the extent of Rs 2884.41 crore, Rs 3277.30 crore and Rs 3804.73 crore as compared to its total income of Rs 11073.58 crore, Rs 13727.12 crore and Rs 7738.46 crore, respectively in Fiscal 2012 and 2013 (on a consolidated basis) and in the six months ended September 30, 2013 (on a standalone basis), respectively.

The power transmission revenues of the company principally depend on the tariffs stipulated by the CERC for power transmission and the project expenses for which it is reimbursed. The tariff is subject to change and review by the GoI, and may be decreased in future periods or for specific projects if so deemed fit by the GoI or any regulatory authority, which could materially and adversely affect the financials of the company. Current tariff norms (assuring ROE of 15.5% on cost-plus basis) are expected to be applicable until March 31, 2014 and a new tariff norm is expected to come into force with effect from April 1, 2014 for a period of five years. In case of any adverse change, financial condition and results of operations could be materially and adversely affected.

Effective Jan 6, 2011 all transmission projects except some identified projects are to be awarded under tariff based competitive bidding (TBCB) route. The company has secured only 3 of the seven projects awarded under TBCB route. If in future competition increases, the company's ability to bag projects for future growth needs to be seen.

As per CERC regulation the company gets return on equity in a transmission project only after the commencement of commercial operation of that project. Since the transmission projects are linked to power generation projects any delay in generation projects will result in delay in transmission projects. Even in some case if the transmission projects got ready and generation projects not ready, the company will not be able to recover its fixed costs unless CERC agree to declare transmission project commercial. Mostly CERC declare the transmission project commercial in case TS ready and generation project not ready but that is not assured.

The company's intention to enter into construction and management of intra state Transmission & Distribution network will further increase its exposure to state PSUs.

Operations and performance are subject to regulation and policies of Government of India that governs the power sector.

Valuation

For the fiscal ended March 2013 the standalone revenue of the company grew by 26% (to Rs 12757.85 crore) and its net profit is up by 30% to Rs 4234.50 crore. On post FPO equity, the EPS works out to Rs 8.1. The PE at floor price (Rs 85) and cap price (Rs 90) works out to 10.5 times and 11.1 times respectively. At current price of Rs 145, NTPC, the nearest comparable company, is trading at 9.5 times its standalone FY13 EPS (Rs 15.3). However, growth track record of PGCIL is much better than NTPC.

In the last three months, high, low and average price of PGCIL was Rs 104, Rs 91.7 and Rs 98, respectively. The stock beta was low at around 0.62 indicates low market related risks.

The book value (per share) works out to Rs 64.21 at floor price and Rs 64.79 at cap price on dividing the post FPO standalone net-worth as on Sep 30, 2013 with expanded post FPO equity. The price to book value works out to 1.3-1.4 times. In comparison the book value of NTPC was at Rs 103.58 and its price to book value was 1.4 times.

The main investor concern with PGCIL is that the company taps primary market with public issues at regular intervals and this puts pressure on the scrip price, which fails to reflect its track record and potential due to constant increase in equity through public offers. The company's last FPO was in November 2010 at the same price band as the current one (Rs 85-90).

The power sector as a whole has been going through challenging times in the last few years. However PGCIL continued to expand its top-line and bottom-line year over year riding on achieving its targeted capacity addition and capitalization. With Government of India taking efforts to address various issues plaguing the power sector and improve the investor confidence, situation can improve in future.