Power Grid Corporation of India Limited (PGCIL)
Name of the Company: PGCIL
Sector/Industry: Power Transmission
Issue Size: 57, 39, 32,895 (approx 57 crores for the convenience of people who have aversion against numbers) equity shares of Rs. 10 each. The issue would constitute 13.64% of the post issue paid up equity capital
Issue Price: Rs 44 - 52
Issue Opens: Monday, Sep 10, 2007
Issue Closes: Thursday, Sep 13, 2007
Promoter(s): President of India
Company Website: www.powergridindia.com
Book Running Lead Manager: Kotak, Citigroup and Enam.
Registrar: Karvy Computershare Private Ltd
Draft Red Herring Prospectus: http://capitalmarket.com/pub/dp/dp5455.pdf
About the Company: Power Grid operates most of India’s inter-state transmission assets and is the nodal agency for wheeling power across the country. It also operates 19000 km of fibre optic cable network. It also provides consultancy services to companies involved in power transmission in Africa and West Asia.
PGCIL has been designated a ‘Mini Ratna Category – 1’ public sector undertaking.
Objectives of the Issue:
The net proceed of the issue would be used for 15 identified transmission projects. These transmission projects would enhance the length of PGCIL’s transmission system by 13,022 circuit kilometers.
Strengths:
PGCIL is into core business of power transmission. It has monopoly over power transmission business in India. The recent Electricity Act which came into effect in June 2003, allows private players into transmission and distribution business. But till now there are only few private players, whose size is very small compared to PGCIL. As such, India is horrendously power starved country and can accommodate few players of the size of PGCIL.
Telecom infrastructure is huge growth story: PGCIL owns and operates a fibre-optic cable network that as on March 31, 2007 was over 19,000 kilometres long and connects over 60 Indian cities, including all major metropolitan areas. It leases this bandwidth to major telecom players. PGCIL’s bandwidth business posted revenue of Rs 160 crore for the FY 05 – 06. Revenues due to bandwidth business have huge profit margins because maintenance costs are negligible. With the arrival of digitized service like IPTV, VoIP etc the bandwidth business holds lot of potential.
Consultancy Business: It also provides consultancy services to companies involved in power transmission in Africa and West Asia. Most of the countries in this region are power as well as technologically starved. A company like PGCIL has huge growth potential in providing consultancy and technological support. PGCIL obtained revenue’s worth Rs 200 crore through consultancy business for the FY 05 – 06. Like bandwidth, this business too has huge profit margins. Like India, most of the African countries are also power starved
Weakness:
PGCIL provides credit to state utility companies whose financial health is not so credit worthy. Most of the state utility companies are bleeding because of the whims and fancies of netas and babus. Most of the utilities survive on government subsidies. One of the major reasons for loss is theft of power. Ask any babu of utility company about theft and he will reply, “No theft at all. It is just Transmission and Distribution (T &D) losses”. T&D is the euphemism used to hide theft of power. However with The Electricity (Amendment) Act - 2007, applicable from 15 June 2007, earnest efforts are made to reduce theft of power. GoI has reconciled to the fact that subsidies are no longer sustainable.
Financial Summary:
For nine months ending December 31, 2006, PGCIL achieved 2781 crores as revenues and 795 crores as profit after tax. On post issue equity, the full year earnings per share (EPS) would be approximately Rs 3. We can expect PGCIL to clock EPS of Rs 4 for the FY 07 -08.
Valuation:
At the upper end, the forward P|E ratio would be 13. The valuation look a bit stretched for a PSU undertaking but may be it is justified considering the monopoly and potential of the business. It also has ‘Mini-Ratna’ tag to boost of.
Recommendation:
It is one of the stocks which you must have in your portfolio. The Buffets and Jhunjhunwalas of the market would definitely endorse this issue without any second thoughts. I will be comfortable with this stock even if the stock markets were to close for next 10 years.
PGCIL is a core story which will definitely create long term wealth. You can expect listing gains of 15 -20% but selling it on listing day would be injustice to the process of creation of wealth. You can expect gains in excess of 100% in a year’s time and hence it would be prudent to hold it for at least one year.
Considering the fact that this is 980 (approx) crore issue in retail category, I think it will be oversubscribed by 5 -6 times.
Inputs from:
PGCIL’s DRHP.
