Upside in PGCIL from power trading, telecom biz: Edelweiss

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India's principal power transmission company and Mini-Ratna Category- I public sector undertaking, Power Grid Corporation of India is entering the capital markets with an initial public offering (IPO) of 573,932,895 equity shares of Rs 10 each for cash at a price to be decided through a 100% book building process. The company will raise Rs 2984 crore in higher end of the band of Rs 44-52.

Edelweiss Securities report on Power Grid Corp IPO

We believe the Indian power sector is at the crossroads with huge capacity addition planned in the power generation and transmission space. Power Grid Corporation of India (PGCIL) itself is likely to invest ~INR 545 billion in the Eleventh Plan period for expanding capacity. While capacity addition is likely to depress the company's return ratios in the medium term, it will be a driver of growth and stable cash flows in the long term. We believe PGCIL, the principal power transmission utility in India, is likely to be one of the primary beneficiaries of the changing dynamics in the power sector.
 
At the upper band, the IPO is priced at a P/B ratio of 1.6x and 1.4x for FY08E and FY09E, respectively, while the RoE is 10.1% for both FY08E and FY09E. We have a DCF value of INR 62 for FY08E, which is ~20% above the price at the upper band. Additional upsides are likely to come from power trading and higher-than -expected returns from the telecom business. We recommend investors to 'Subscribe' to the issue.
 
Growth in power sector inevitable

We believe the below plan capacity addition in power generation and transmission in the previous plan periods is likely to result in higher growth in capacities in the Eleventh and Twelfth plans, as capacity additions become inevitable to feed the growing appetite of the Indian economy. PGCIL occupies a key position in plans for growth and development of the power sector, since it is India's primary power transmission company.
 
Strong governmental support a boon

Being wholly owned by the government of India (GoI), PGCIL has strong support from the same. PGCIL has been designated a Mini- Ratna Category-I public sector undertaking since October 1998 by GoI. This support facilitates various approvals from government agencies and bodies, which are a significant in the power transmission business.

Telecommunication drawing on synergies from transmission network

PGCIL currently owns over 19,000 km of fiber optic network connecting over 60 Indian cities. Further, the company has presence in remote areas like Jammu & Kashmir, Himachal Pradesh, and North Eastern regions. We believe the company's telecommunication business is likely to breakeven ahead of schedule and be a growth driver as PGCIL acquires more customers in the medium term.