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Power Grid Corporation - IPO Note

Thursday, September 6, 2007

Power Grid Corporation (PGCIL) is India’s principal power transmission company. It has been designated a Mini-Ratna Category-I public sector undertaking since October 1998. This provides it with powers to undertake new projects without government of India (GoI) approval, subject to an investment ceiling set by the government. The company has received the highest annual performance rating from the Gol in each year since the year ending March 1994 (FY 1994).

PGCIL owns and operates most of India's interstate and inter-regional electric power transmission system. In that capacity, the company owned and operated 61,875 circuit kilometres (ckm) of electrical transmission lines and 106 electrical substations. In FY 2007, the company transmitted approximately 298 billion units of electricity, representing approximately 45% of all the power generated in India. Since its inception, it has completed 101 transmission projects and schemes.

The average system availability maintained by PGCIL was over 99% since FY 2002. The transmission losses were in the range of 3%-4%, representing mainly technical losses. As the power is transmitted over high voltage, it generally does not involve commercial losses. Nevertheless, transmission losses are factored in the tariff. As a result, it does not impact PGCIL

By creating a telecommunications network principally using its overhead transmission infrastructure, PGCIL has also diversified into the consultancy and telecommunications business, It owns and operates a fibre-optic cable network of over 19,000 kilometres. The company has been leasing out bandwidth on this network to more than 60 customers, including major telecom operators such as BSNL, VSNL, Tata Teleservices, Reliance Communications and Bharti Airtel. In July 2006, it also received a license to provide telecommunication services to end-users and is currently exploring options for providing these services.

The current initial public offering (IPO) by PGCIL is primarily to fund its transmission projects and to partly disinvest the government stake.

Strengths

  • Subject to government approvals, PGCIL has plans to invest Rs 55000 crore on transmission infrastructure during the eleventh five-year plan. With this investment PGCIL has plan to increase its inter regional capacity from 14600 MW to about 37000 MW in the eleventh five-year plan. This includes 45 projects that are currently being implemented by PGCIL, which would increase its transmission lines by 30536-ckm and transformer capacity by 29420 MVA.
  • With a debt-equity ratio of 70:30, the equity contribution is likely to be Rs 16500 crore. As PGCIL earns a regulated return on equity (ROE) of 14% (excluding north-eastern region), it will lead to additional profit of Rs 2310 crore. The company had earned ROE of 10.16% in FY 2007 as it had huge funds blocked in capital work-in-progress (WIP) and had incurred loss in the telecom business. PGCIL had a capital WIP of Rs 6083.89 crore end March 2007. However, it is earning ROE of 15% on its operational power projects.
  • In Q1 (June quarter) of FY 2008, PGCIL commissioned transmission assets worth Rs 2490.49 crore. Apart from this, four more projects (for which the company is raising fund and has spent Rs 704 crore till end July 2007) are to be commissioned in FY 2008. These projects are likely to drive PGCIL’s near term earning.
  • Working capital management has improved over a period of time. The average receivable collection period has declined from 76 days in FY 2005 to 47 days in FY 2007. The improvement in working capital management is also visible in the growth in net operating cash flows, which have increased to 1.6 times from Rs 2795.22 crore to Rs 4345.85 crore in this period. Presently, PGCIL has been able to collect nearly 100% of its receivables from state power utilities on time.
  • The transmission network of PGCIL increased from 50,745 ckm in FY 2005 to 59,461ckm in FY 2007 and to 61,875 ckm end Q1 of FY 2008. The ratio of ckm to employees has increased from 7.4 ckm in FY 2005 to 8 ckm in FY 2007 and to 8.3 ckm in Q1 of FY 2008. Revenue per employee has increased from Rs 37 lakh in FY 2005 to Rs 48 lakh in FY 2007.
  • Unlike power generation utilities, PGCIL was able to achieve its Tenth Five-Year Plan physical target with lower outlay.
  • The power transmission industry is capital and technology intensive. This acts as an entry barrier, giving a monopoly to existing players. Roughly it takes about Rs 1 crore of investment to set up 1 ckm of transmission line.
  • While starting the telecom business, PGCIL had targeted to make profit from FY 2009. However, the company has managed to post profit in Q1 of FY 2008. As against a loss of Rs 21.96 crore in FY 2006 and Rs 3.73 crore in FY 2007, it posted profit of Rs 9.09 crore in Q1 of FY 2008. For the full year, PGCIL expects to post handsome profit.

Weaknesses

  • PGCIL operates in a highly regulated industry. Its current tariff structure is likely to remain in place till FY 2009. Any change in the current tariff policy by the Central Electricity Regulatory Commission (CERC) could adversely impact the company. In the past, CERC has reduced the company’s ROE from 16% to 14% from FY 2005 and had capped the maximum incentive to 2% from 4% earlier. Thus, PGCIL’s net profit had declined from Rs 1023.16 crore in FY 2004 to Rs 829.78 crore in FY 2005. Subsequently with more projects coming on stream and increase in absolute contribution from other businesses, the company’s net profit recovered to Rs 1087.66 crore in FY 2007. At present, however, it appears unlikely that CERC will further reduce ROE as the earlier cut was in a scenario of declining interest rate.
  • Typically, PGICL undertakes projects to extend its transmission infrastructure. New electricity generators are connected to its transmission system. As PGCIL is paid ROE only after the commencement of service of a transmission project, delay in its transmission project or the related electricity generation project could block the company’s equity. PGCIL may, thus, go without any returns on that equity during the course of the delay.

Valuation

FY 2007 EPS on post-issue equity works out to Rs 2.6 and Q1 of FY 2008 annualised EPS Rs 4.3. However, translation gain of Rs 198.34 crore has led to decline in reported interest cost and has inflated Q1 of FY 2008 earning. So actual EPS for FY 2008 is likely to be lower than the annualised EPS of Rs 4.3

At the offer price band of Rs 44-Rs 52 and on the basis of FY 2007 earning, the P/E range works out to 17-20.1, respectively. There is no exactly comparable listed entity. PSU power generation major NTPC trades around P/E of 20 times FY 2007 EPS. Generation/transmission utility companies generally do not get such premium valuations. But the encouraging growth prospects in the power sector in India in the next five years have pushed up P/Es. Moreover, PGCIL is the only company through which investors will be able to get direct exposure to the power transmission sector. This will stand them in good stead.

Posted by FR at 7:28 PM  

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Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective.The information contained herein is based on analysis and up on sources that we consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it.& take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations given in this blog.