Investment Shastra

Power Grid Corporation FPO: Can it power your portfolio?

Details of the issue:

Issue Date: 3rd – 6th December, 2012 (for retail investors)

Face Value: Rs. 10

Price Band: Rs. 85 to Rs. 90 (5% discount on issue price for retail investors)

Issue Type: Fresh issue and Government stake sale

Issue Size: 60.18 Cr. fresh shares and 18.51 shares to be sold by Government

Issue Size: Rs. 6,689 Cr. to Rs. 7,083 Cr.

Market Bid Lot: 150 shares and in multiples of 150 shares thereafter

So, what is the subscription offer? Here is a review of the Power Grid Corporation FPO…

Power Grid Corporation of India Limited (PGCIL), a ‘Navratna’ PSU, engaged in the business of transmission of electric power has come out with an FPO of 78,70,53,309 shares of Rs. 10 each. The issue consists of a fresh issue of 60,18,64,295 shares by the company and an offer for sale of 18,51,89,014 shares by the President of India (i.e. dilution of 4% stake by the Government of India). The government holding in the company will come down to 57.89% post FPO from the present level of 69.42%. As much as 50 per cent of the net issue is allocated to Qualified Institutional Buyers (QIBs), 35 per cent for retail category and 15 per cent for High Network Investors (HNI). Above 0.38 per cent of the issue is reserved for employees.

The price band for the issue has been fixed at Rs. 85 – 90. Retail investors and eligible employees of the company will get 5% discount on the issue price. So, the effective price for them will be Rs. 85.5, if the issue is fixed on the upper end of the price band.

Tell me about Power Grid Corporation…

PGCIL, a Navratna PSU, is engaged in the business of transmission of electric power. It is entrusted with the role of Central Transmission Utility (CTU) by the Government of India. The company operates as one of the chief agencies responsible for the planning and development of the country’s nationwide power transmission network, including interstate networks. The important segments, in which PGCIL operates, are: Transmission, telecom and consultancy.

Power transmission business contributes about 95% to the total revenue of the company. It wheels about 50% of the total power generated in the country on its transmission network. As in November 2013, PGCIL is operating more than 1,02,540 circuit kilometres (ckm) of transmission lines along with 173 substations with transformation capacity of more than 1,76,323 MVA. The company also provides consultancy services and has established a robust telecom network across the country.

Use of proceeds:

The money raised through FPO will be utilised to fund PGCIL’s 27 identified transmission projects and for general corporate purposes, according to the prospectus issued by the company. The identified projects include projects for transmission lines  for  evacuation  of  power  from  generation  projects  and strengthening  of  existing  grid  and  inter-regional system. The  transmission  projects  are expected  to  enhance  the  length  of  our  transmission  system  by  22,103 circuit kilometres (ckm).

How has the performance of Power Grid Corporation been?

Historical Financial Performance:

The 10 Year X-Ray of the company shows that the performance of the company has been good in terms of sales and profits. Over the past 5 years, net sales and EPS have shown good growth, clocking CAGRs of 21% and 16%, respectively. The company has been continuously expanding its transmission network leading to rise in sales and subsequent rise in profits.

The above graph shows that the company has maintained good and stable margins over the years. OPM has been in the range of 80-90%, whereas NPM has been in the range of 25-33%. Operating margins are very high as the company does not have to incur much recurring costs after incurring capital expenditure. The company has to bear operating expenses only in the form of employees’ salaries and maintenance expenditure. However, there is a huge gap between OPM and NPM, reasons beings company’s high interest payments because of high debt and also, high depreciation on account of huge asset base.
The company requires huge funds for the expansion of its network, and hence the debt on its books is high. As a result, debt to Cash Flow from Operations has been high in the range of 5 to 8 and is a concern. Debt to equity ratio has also been very high. The negative Value Creation Index numbers indicate that the costs incurred on capital have been higher than the returns generated. However, in an asset creation business like that of Power Grid’s, there is lot of capital which is locked up but has not started generating returns. If ROCE is adjusted for such ‘Capital Work in Progress’, it is observed that Power Grid has clocked positive Value Creation Index numbers leading to value creation.
The company has performed well on growth parameters and has had a fair value creation history. As a result, the 10 Year X-Ray performance of Power Grid Corporation has been rated as ORANGE (Somewhat Good).

What can we expect in the future? Here is an analysis…

Bright prospects of the Indian power sector:

India has always been a power-deficient country. Over the years, the demand for power has always been greater than its supply. This power deficit is expected to continue in future because India is an emerging economy characterised by rapid urbanization and industrialization. The rising population of India will also lead to rise in the demand for power. For meeting this ever rising demand for power, huge generation capacity addition is required. Accordingly, ambitious generation capacity addition plan has been envisaged in the 12th Five Year Plan. The rise in generation of power will subsequently require rise in the power transmission capacity. PGCIL being the central transmission utility will play a crucial role in this. Hence, there is no dearth of opportunities for PGCIL.

Under-investment in the Transmission and Distribution industry:

Transmission and Distribution is as important as generation. The capacity additions to meet India’s growing power demand should be supplemented by adequate transmission infrastructure. Globally, every dollar invested in generation has an equal amount invested in transmission and distribution. However, in India traditionally every dollar invested in generation has a corresponding half a dollar invested in transmission and distribution. Due to this, transmission capacity in India lags behind the generation capacity. Huge investments are required in Transmission and Distribution if India’s power sector is to meet the rising power demand.

Expansion plans of the company:

PGCIL currently has 1,02,540 ckm of transmission lines across the country. It plans to add 40,000 ckm of transmission line in the 12th five year plan (2012 – 2017). For this, the company has doubled the planned expenditure for the 12th plan. Expenditure planned for the 11th plan was Rs. 55,000 Cr. and for the 12th plan, the expenditure earmarked is to the tune of Rs. 1,10,000 Cr. So far, in the 1.5 years of the 12th five year period (2012-2017), the company has incurred a capital expenditure of over 30,000 Cr. and is on track with respect to the planned investment in the 12th Five Year period. These funds will be primarily used for transmission of power from ultra-mega power projects (UMPP), high capacity power transmission corridors (HPCTC) and system strengthening. Efficient conversion of these funds in to transmission assets will lead to good growth in revenues and profits.

PGCIL’s High capacity power transmission corridors (HCPTC):

Private sector participation in power generation industry is bound to increase in the coming years considering the encouragement from Government and the opportunities available in the power sector. This will necessitate the need for an inter-state transmission network linking private generation companies (known as Independent Power Producers) to various parts of the country. PGCIL has undertaken development of nine High Capacity Transmission Corridors (HCPTC) linking independent power producers (IPP) plants in several states including Orissa, Chhattisgarh, Jharkhand, Sikkim, Andhra Pradesh, Tamil Nadu and Madhya Pradesh to different regions of India.

Other positives for the company:

  • The company is looking at opportunities in the overseas market not just in the transmission space but also in generation.
  • The company has a secured payment mechanism in place, where it enters in to tripartite agreements with RBI and the respective state governments which secures it from payment risk.

But what are the concerns?

  • Delay in commissioning of power generation of projects, or reduced generation of power due to shortage of fuel (coal).
  • In case of such delays, the company stands to lose if it is not allowed to bill the beneficiaries for an unutilized transmission line.
  • Slow environmental and ‘right of way’ clearances.

The future outlook of the power sector is quite good considering the rising demand for power in India, and the generation capacity addition plans. The addition in generation capacity has to be accompanied by increase in transmission capacity. PGCIL, being India’s central transmission utility has an important role to play in the future. The company has good investment plans in the future in order to meet India’s power transmission needs.
The company enjoys dominance with almost 100% market share in the inter-state transmission industry and around 50% in the intrastate transmission. The huge capital and experience required for this kind of business, creates a barrier for competition. On the whole, the long term future prospects of PGCIL appear to be Green (Very Good).

So, should I invest in PGCIL’s FPO?

According to MoneyWorks4me analysis, at the IPO price band of Rs. 85-90, Power Grid would be trading at a discount as compared to its equity’s intrinsic value.

We expect the company will continue to grow its sales and profits based on the prospects of the power transmission industry and the investment plans of the company. Even if the FPO closes at the upper end of the Price Band i.e. Rs. 90, retail investors will get it at an effective price of Rs. 85.5 as they are eligible for a 5% discount. A price of 85.5 is close to the Discount Price and is an attractive buy price as per MoneyWorks4me analysis. We therefore advise retail investors to consider subscribing to the issue from a long term perspective.

Disclaimer: This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations or needs of an individual client or a corporate/s or any entity/ies. The person should use his/her own judgment while taking investment decisions.

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