IPO Analysis & Reviews: Power Grid Corporation

IPO Analysis & Reviews: Power Grid Corporation

Last Date: 13th Sept. 2007
Price band: Rs. 44-52
No of shares: 573,932,895 equity shares
PE:Issue Size: Rs 2984 crore.

Positives:
1) Power Grid Corp. of India Ltd (PGCIL ) is the country’s principal power transmission company and Mini-Ratna.
2) Since I believe the infrastructure esp. power is going to drive India’s second phase of development, this company is well poised to benefit from it. It owns and operates almost all of the nation’s interstate and inter-region transmission systems. (61,875 km of transmission line and 106 substations) Last year about 298 billion units were transmitted through their infrastructure (about 45% of the power generated).
3) This company has no competitors and even in the next 10-15 years, I do not foresee any other infrastructure company (indian or foreign) to pose a threat. This is primarily because Power grid has acquired a lot of land for the transmission lines at very low prices, and it would be very tough for another company to replicate their model.
4) PTC India Ltd is soon going to start up a electricity trading board where states can sell and buy power at real time. All this power is going to go through the national power grid… So the company positioned to benefit from this is Power Grid Corporation.
5) The country is going for Mega (larger) power plants which satisfies the need of the region instead of having numerous power plants in individual cities. This creates a big business opportunity for Power Grid.
6) PGCIL is an effective monopoly in the inter-regional transmission space; though private players could enter the business, they are unlikely to dent the company’s prospects significantly. PGCIL’s valuable in-house design an d engineering expertise is a major competitive asset.
7) The company has been proactive in its business especially in forging tie-ups with private players. The joint venture with the Tatas for the Tata transmission infrastructure and the ones forged with the Torrent and Jaiprakash groups for evacuating power from specific generation projects are examples. PGCIL is also forming an equal joint venture with Infrastructure Leasing and Financial Services for development of transmission and sub-transmission projects at the State level and outside the country.
8) PGCIL’s high operating efficiency as proven by its system availability of over 99 per cent for the last five years allows it to earn valuable additional incentive income.
9) Though its leverage is on the high side at 1.81:1, the company’s financials appear sound. Interest costs are passed through to customers and, therefore, higher debt does not impact the bottomline.
10) The company’s plans to diversify its revenue stream by focussing on consultancy, telecom and power distribution business under the Central government-sponsored schemes augur well. PGCIL is also in the fray for the privatisation o f the National Transmission Corporation of the Philippines.

Negatives:
1) Transmission lines have huge infrastructure and fixed costs. Along with the land value, an interstate power transmission lines often costs more than the power plant itself.
2) This a a government owned company (bureaucratic losses, red tape etc.) so it might take a couple of years for it to generate some real wealth for the investors.
3) In short over a 3-5 year horizon, this company should do wonders (just like NTPC), but in short term it might not generate sufficient wealth for the investors primarily because of its inefficient governmental legacy.
4) The biggest concern is regulatory overhang over the business. The current tariff order of CERC ends in 2009 and there is a strong possibility of the regulator marking down the 14 per cent return on equity in the new order due then. Thi s could have revenue implications for PGCIL.
5) PGCIL may soon have to shift to competitive bidding mode for new projects. The CERC has been empowered to direct competitive bidding whenever it feels the ground is prepared for competition; at the latest, competitive bidding should be a reality by 2011, going by the government’s time-frame. Competitors could enter the fray once the new system is in place and PGCIL will have to change its strategies accordingly. The company’s experience and size could be formidable assets here though.
6) The growth prospects could be tempered by the ability to garner funds for expansion. The 70:30 debt:equity norm laid down by the CERC for funding new projects means that the company will have to leverage itself significantly over the p resent 1.81:1. The company may have to guard against leveraging beyond prudent levels.
7) The government, as the majority shareholder, plays a significant role in the company’s fortunes. Post-IPO, it will hold 86 per cent of the equity. Given the experience with other listed public sector companies where the government has dabbled in business, this is a matter of concern.

Our Take:
The offer price band of Rs 44-52 per share is at a price earnings multiple of 15-18 based on fully diluted 2006-07 earnings. There is no comparative play in the market now but on qualitative factors alone, the price appears to be reasonable.
Overall it seems to be a good invetment & Invest at Cut-off price of Rs. 52 and can go upto RS. 85 on listing day.

(information sourced from various websites and articles)

Please post your comments / suggestions below

You can also email your comments at ldhgames@yahoo.com

For Indian stock tips visit: http://strongtips.blogspot.com/
For Indian stock tips visit: http://strongtips.blogspot.com/
For Indian stock tips visit: http://strongtips.blogspot.com/