Subscribe to Power Grid IPO: UTI Securities

UTI Securities has recommend investors to subscribe to Power Grid Corporation of India IPO. 

 

UTI Securities report on Power Grid Corporation of India:

 

Company Background 

 

Power Grid Corporation of India (PGCIL) is a public financial institution promoted by the Government of  India (GoI) engaged in power transmission business. The company commenced operation in 1992 when GoI  consolidated all the inter-state & inter-regional capacities under a single entity. It owns & operates most of these  assets aggregating to 61,875 ckms and 106 substations. Over the last 15 years it has executed 101 projects  amounting to Rs 251.8 billion and is in the process of executing an additional Rs 550 billion worth projects over  the next 5 years. PGCIL also owns 19,000 fibre kms of cable network covering 60 cities with large number of  customers across the telecommunication domain. It also provides consultancy service to companies in the  transmission vertical. Through a JV with Tata Power PGCIL has commissioned Tala transmission network  connecting Bhutan to Delhi. PGCIL also has a stake in 2 JVs with Torrent Power Ltd. and Jaiprakash Hydro Ltd.

 

Gist of CERC norms

 

• All capex needs to be financed in the debt equity ratio of 70:30.

• Interest cost, Income Tax & Foreign exchange fluctuations would be on actuals

• Depreciation would be amortised over the life of the asset and the annual ammortised amount would be

utilized to repay principal component of the long term debt

• O&M expenses is based on normative parameters benchmarked to ckms & bays outlined by CERC

• Profit After Tax = 14% of the equity component of the capex. For north eastern region the rate is 13%.

• Efficiency gain is based on the % number of times the transmission lines are available beyond the

prescribed level. The prescribed level of availability is:- HVDC-95% and AC - 98%.

 

Revenue Streams

 

Transmission Business : Operating under a regulated environment PGCIL's revenues & profitability is based on norms specified by Central Regulatory Commission (CERC). Since the revenues are based on cost + margin basis, at the operational level there is limited scope to enhance profitability. Hence, PGCIL's earnings growth would be a function of incremental capex & ensuring high availability. This business accounts for 80% of revenues. The company also earns 10% of its revenues by providing consultancy services to companies in the transmission vertical as well from its 19,000 fckm telecommunication network while the balance 10% is from other income.

 

Payment Security mechanism

 

All the state government entities would open Letters of Credit (LC's) to the extent of 105% of the receivables  which would be encashed in case there is a default in meeting their payment obligation. However, post the one  time settlement mechanism PGCIL has been receiving its dues in time. As of FY07 the debt collection period was  50 days which is within the regulated limits detailed by CERC.

 

Industry Scenario

 

The power sector is at an evolutionary stage in India. Historically the power industry in India has been   characterized by energy shortages. The GoI's mission of "Power for all by 2012" estimated that India's installed   generation capacity should reach 218,209 MW by the end of its XI Plan in 2012 compared to 132,329 MW as on   March 31,2007. This will require huge investment across the various segments of the Power Sector.    

 

The Issue  

 

The public offer is for 573.9mn shares (FV Rs.10) comprising of 382.6mn fresh issue of equity shares and 191.3mn   shares offered by GoI which would reduce their post-issue stake to 86.4%. The company's market capitalisation is   expected to be in the range of Rs. 185.2bn. - Rs.218.8bn. at the lower and upper end of the price band   respectively.  

 

Objects of the issue  

 

To finance capex program aggregating to Rs 127,075 million translating to 13,022 ckms, PGCIL would be utilizing   proceeds from the issue towards the equity component of the expansion plan.  

 

Investment Rationale

 

PGCIL is India's largest power transmission company and in charge of developing the crucial National Grid comprising of 37,150 MW transmission capacity by 2012 from the existing 14,100 MW.

 

Proven expertise in the domain and currently transmits 45% share of India's power.

 

Post the OTS in 2003 PGCIL has been receiving close to 100% of its dues from SEBs in time

 

The average system availability has been more than 99% due to which PGCIL has been able to earn some efficiency gains. The management has indicated that adjusted for cap WIP the overall RoE on its power business is around 15.0-15.5%.

 

The management is targeting a PAT CAGR of ~ 28% over FY07-FY12.

 

The telecom & transmission backbone could be leveraged to generate additional revenue. While some of the benefits would be passed on valuation could improve. �� To sustain growth, PGCIL is exploring inorganic opportunities and in this regard has submiited a bid for National Transmission Corporation in Philippines.

 

Key Concerns

 

PGCIL's current debt : equity is 1.8 : 1 and it has set itself an aggressive equity capex target of Rs 165 bn. With FY09 PAT expected around Rs 20 bn, the company could resort to more debt to fund the capex.

 

The regulated RoE has been reduced from 16% to 14% in 2004. Despite severity of the power deficit in India GoI and CERC's objectives has been to minimize the cost of power at the consumer end. Hence, we believe any gains beyond a reasonable level would be capped / passed on.

 

The APDRP scheme is in the process of being modified with disbursements linked to actual performance / achievement of targets. This could delay allocation / execution of some projects.

 

The commissioning of a transmission line is contingent on successful completion of a generation unit connected to it. If the generation is delayed revenues accruing to the transmission line is also delayed.

 

Recommendation 

 

PGCIL is a play on India's fast growing power sector. Encashing on the power shortage, grid indiscipline,  inadequate inter-regional evacuation capacity and spinning reserves PGCIL has charted an aggressive growth path  for the next 5 years. PGCIL is likely to maintain monopoly status in the foreseeable future its efficiency gains and  the resultant RoE would be lower compared to NTPC. Hence, we believe it should trade at a discount to the latter  in terms of P/BV multiple. The issue is priced at 1.3x - 1.6x BV based on the lower & upper band and considering  the expansion plans and the resultant earnings growth we recommend investors to SUBSCRIBE to the issue.