Power Grid prospects good despite modest growth: Prabhudas

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Power Grid prospects good despite modest growth: Prabhudas

Apurva Shah of Prabhudas Lilladher said that the call on Power Grid Corporation of India Limited is certainly a subscribe.

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Excerpts from Closing Bell on CNBC-TV18 Watch the full show » RELATED NEWS Upside in PGCIL from power trading, telecom biz: Edelweiss Subscribe to Power Grid IPO: UTI Securities Subscribe Power Grid Corporation IPO: ASK Sec PGCIL to invest Rs 55,000 cr in 5 years Nifty BSE | NSE 25/05/12 Are Mutual Funds betting on Nifty? Other Stocks in this news KEC International | NTPC | Reliance Infrastructure | Tata Power Company |

Apurva Shah of Prabhudas Lilladher said that the call on Power Grid Corporation of India Limited is certainly a subscribe.

He added that the company had near monopoly in the transmission space and the prospects continue to remain good, even though it showed modest growth.

Excerpts from CNBC-TV18's exclusive interview with Apurva Shah:

Q: What is the call, is this a subscribe and why do you like Power Grid?

A:  It is certainly a subscribe. We like Power Grid because it is one of the best plays in the overall transmission capacity, that is likely to come up in the next four to five years or maybe even longer. It has near monopoly in the transmission space and the prospects for the sector continue to remain good. So, it is certainly an attractive investment at about Rs 50 odd levels.

Q: What kind of comparables can one think of? There are no strict comparables to Power Grid but if you want to benchmark the valuations at which the IPO is coming, who would you do that against?

A: Actually there are no direct comparables. But it is a different sort of a utility. It is not a power utility in the classic sense, but it is a regulator entity, which is very low risk and at the same time very low returns as well. If you see the financial numbers, it is a modest growth company, growing at probably 15-20% kind of growth over the next few years.

Its return ratios are in single digits, which is about 8-9%. At the same time, since it is a near monopoly and the risks are very low, it runs at extremely high efficiency at almost 99%+. So, despite these relatively weak looking financials, I think the IPO still remains a pretty decent investment.

Q: How do you map valuations for this one?

A: The only way to do is to do a DCF in this. In this case, unlike many other companies, DCF is relatively safe, because you don't have to make too many tall assumptions. The track record is available. Some of the assumptions on growth et cetera are much more on safer grounds. So, if you do a DCF, we at least come to a figure of somewhere around Rs 60-65.

Q: Why would you pick a Power Grid, even though the comparables are not strict against a listed entity already that might deliver stronger returns?

A: To play the transmission sector, I would want to play it through the suppliers, which is KEC , Jyoti and the likes. These companies are doing extremely well and I think PGCIL itself is a good play. Though I do agree that in terms of growth, it will be much lesser than any of these plays, though ironically all of them are suppliers to PGCIL and depend on PGCIL for growth.

Q: You mentioned the Rs 50 mark, do you think that the issue might get done in the middle of the band, even if subscription is high or appetite is high?

A: If the appetite is high, they can of course close it at the upper band. But sometimes it is a management call and this being in the public sector, one can't really predict. So, it is quite possible that they may price it a little lower.

Q: What else do you like in this sector; there has been a good rally in stocks like NTPC , Reliance Energy , Tata Power . In that whole basket, what is the good one?

A: We do like Reliance Energy. But of course there is an element of gas pricing, which gives a little bit of uncertainty in the stock, though one does get the sense from media reports that it should get resolved sooner rather than later.

So, if you account for that, Reliance Energy is likely to remain a longer-term play but a good investment. Though of course nothing is going to happen in the company in the next one to one and half years.