Subscribe Power Grid Corporation IPO: ASK Sec

ASK Securities research has come out with their report on Power Grid Corporation of India, IPO. Research firm has recommended subscribe IPO at the higher end of the band (Rs52).

 

ASK Securities report on Power Grid Corporation of India:

 

Investment led growth

 

Power Grid Corporation of India (PGCIL) is India's largest central transmission utility (CTU) with a mini-navratna status accorded by the Government. It owns and operates most of India's interstate and interregional electric power transmission system. In that capacity, as on 31 March 2007, it owned and operated 59,461 circuit kilometres of electrical transmission lines and 104 electrical substations. It has been identified as a nodal agency by the Government to set up inter-regional transmission capacity in India.

 

The company is coming out with an IPO of 560 mn equity shares in the price band of Rs44-52, totaling to Rs30 bn (at the higher end of the band) mainly for financing the identified projects in the transmission space. With an EPS of Rs2.9 for FY07, it is priced at a PE of 17.9x on the higher end of the price band and 15.2x at the lower end of the price band.

 

PGCIL has a robust business model due to assured returns on its investments and major risks like exchange rate fluctuations on debt, tax and interest as pass through. The company has excellent operational availability, above 99%, that allows it to earn the incentive component as well.

 

Going forward, PGCIL has planned capex to the tune of Rs550 bn in the XIth Five Year Plan (2007-12), as compared to aggregate projects worth Rs248 bn till date. Assured returns on incremental investments should provide steady earnings growth in future.

 

We recommend investors Subscribe at the higher end of the band (Rs52). Major risks to our estimates and call are significant delays in generation capacity additions.  

 

Risks and concerns 

 

Weak credit history of the SEBs:

 

Although PGCIL has been able to  recover 100% in the last three years of its operations from the state  utilities, the risk of default on payment still remains. Moreover, PGCIL's  agreements with the SEBs are backed by letters of credit that cover  105% of the SEBs' preceding twelve months average billings. 

 

Dismal growth in generation capacities:

 

In the long-standing  history of the Indian power sector, nowhere were we able to achieve  more than 60% of targeted capacity addition in generation facilities.  The slow progress or no-addition in capacity due to either nonavailability  of funds, fuel or manpower, or any such factor could stall  the growth in the transmission sector and hence, PGCIL's expansion  program. 

 

Valuations

 

Subscribe at Rs 52:

 

The company is coming out with an IPO of 560 mn equity shares in the price band of Rs44-52, totaling to Rs30 bn (at the higher end of the band) mainly for financing the identified projects in the transmission space. With an EPS of Rs2.9 for FY07, it is priced at a PE of 17.9x on the higher end of the price band and 15.2x at the lower end of the price band.

 

PGCIL has a robust business model due to assured returns on its investments and major risks like exchange rate fluctuations on debt, tax and interest as pass through. The company has excellent operational availability, above 99%, that allows it to earn the incentive component as well.

 

Going forward, PGCIL has planned capex to the tune of Rs550 bn in the XIth Five Year Plan (2007-12), as compared to aggregate projects worth Rs248 bn till date. Assured returns on incremental investments should provide steady earnings growth in future. We recommend investors Subscribe at the higher end of the band (Rs52).