Indian Stock Market

Power Grid Corporation is a great proxy to India’s power sector. Long-= term investors can subscribe to its IPO.
One of the best depictions of India’s power shortage was in the movie Swades= . The residents of a village, who didn’t know what electricity was, assist a= ctor Shah Rukh Khan to create a small power generation unit. The expression = of curiosity on the old lady’s face before the bulb is lit and the 100-watt = gleam on her face after the illumination is something that still needs to re= ach many parts of the country. This is better understood with stati= stics-we have one of the lowest per capita consumption of power. Besides dom= estic electrification, there is a huge demand for power from the industrial = sector. And that is why the government is investing directly or encouraging = private sector investments in power generation capacities. Power tr= ansmission is the next step after generation, as the power needs to reach co= nsumers. If new generation capacity is being set up, there is a need to tran= smit and distribute that capacity. Thus, companies operating in the generation sector will benefit. The IPO Power Grid Corpor= ation of India, the largest player in the power transmission sector, is comi= ng out with an initial public offer of Rs 2,525-2,984 crore at a price band = of Rs 44-52 per share. Like NTPC, Power Grid is a great proxy to India’s gro= wing power sector. Its strong business model, operational efficiency and tar= iff based on assured returns on equity provide stable revenues and low risk.= Besides, its huge future investment in the transmission sector will ensure = long-term earnings growth. “We think it is a good play on the growi= ng power sector. The company is building about 31,000 km of transmission lin= es over the next five years. Compare this to the 68,000 km built over the la= st 60 years, and the number appears huge,” says Jigar Shah, director, KR Cho= ksey. Power generated at a plant is transmitted to a sub-station ne= ar a populated area. Due to the large amount of power involved, transmission normally takes place at high voltage (132 kV or above). Over a long distanc= e, electricity is usually transmitted through overhead power transmission li= nes. The company was incorporated in 1989 as a result of a governme= nt decision to form a national power grid. It managed the transmission asset= s of NTPC, National Hydro Electric, North-Eastern Electric and Neyveli Ligni= te till 1993, when these assets were transferred to Power Grid. Today, it ow= ns and operates most of India’s inter-state and inter-regional electric powe= r transmission networks–i.e from power plants to substations. Powe= r Grid generates about 90 per cent of its total income from transmission bus= iness. The company owns and operates 61,875 circuit km (ckm) of electrical t= ransmission lines and 106 sub-stations. During FY07, the company transmitted= about 298 billion units of electricity, representing about 45 per cent of a= ll the power generated in India. Sound business model Powe= r Grid has a strong business model with its transmission business providing s= table returns with low risks. Central Electricity Regulatory Commission (CER= C), which determines the tariff for the company, has stipulated an assured c= ost-plus-14 per cent return on equity. Besides, on the operational front, Po= wer Grid has maintained an average system availability of above 99 per cent = since FY02, leading to higher income under the incentive-based tariff struct= ure. Around 80 per cent of its revenue comes from the public sector= state utilities, many of which have defaulted in the past. The company says= about 105 per cent of the receivables are backed by letters of credit, and = says that it manages to collect 100 per cent of receivables on a timely basi= s at present. Despite these measures, if state electricity boards default in= future, the company could lose some money. Also, state electricity boards a= re in better financial health than in the past, so this risk is not too different today than in any other business. Power-packed growth = With a large share in the transmission industry coupled with the expe= rtise and operational efficiency, Power Grid has an important role to play i= n India’s growing power sector. Considering the growing economy this gap is = further widening.
India’s power generation capacity increased from 105,046 MW in FY02 to 132,3= 29 MW during FY07 and is expected to reach 219,992 MW by FY12. This will als= o require large investments in power transmission for laying transmission li= nes across the country and inter-regional lines to facilitate distribution a= nd ultimately providing power to consumers.=20
TOWERING EXPANSION FY05 FY06 FY07 Q1FY08 Projects under implementation On completion Transmission network (Circuit km) 50745 5= 5120 59461 61875 30536 92411 Substation (number) 85 93 104 106 3= 4 140 Transformation capacity (MVA) 49442 54377 59417 61307 29420 = 90727 System Availabilty 99.74 99.64 99.2 99.52 NA NA Capital ex= penditure 4133.6 4563.7 6328.6 1717.7 27291 NA The Eleventh Fi= ve Year Plan emphasises the enhancement of the national grid in a phased man= ner to increase the inter-regional power transmission capacity from 14,100 M= W to 37,150 MW by FY12. This envisages an investment of Rs 1.4 lakh crore in= the transmission sector in the Eleventh Plan. Power Grid targets an investm= ent of Rs 55,000 crore as part of this plan till FY12. Mega expansi= on Over the past four years, Power Grid has made a capital expendit= ure of Rs 18,248 crore. As on June 2007, the company had 45 transmission pro= jects at various stages of development totaling to an investment of Rs 27,291 crore. These projects involve 30,536 ckm of transmission lines, whic= h is 50 per cent higher than its existing capacity, as well as new substatio= n capacities. The ongoing projects are scheduled to be completed by June 200= 9. The successful implementation of these projects on schedule will= translate into a total transformation capacity of 90,727 MVA (mega volt-amp= ere) by June 2009. Considering the FY07 realisation of about Rs 5.46 lakh pe= r transmission MVA, the increased capacity has the potential of providing re= venues of Rs 4,959 crore on completion, or 43.5 per cent higher than FY07 tr= ansmission revenues.=20
DIM LIGHT Country Per Capita Consumption (kWh) Canada 17179 USA 13338 Australia 11126 Japan 8076 France= 7689 Germany 7030 United Kingdom 6206 Russia 5642 Italy 56= 44 India 631 Source: International Energy Agency, 2006 Consul= ting gain Besides, the company is also leveraging its capability an= d understanding of the transmission industry to diversify into the consultan= cy business. This accounted for 6 per cent of its FY07 total income and grew= 46 per cent over previous year. Since 1995, this division has provided tran= smission-related consultancy services to over 90 clients involving about 200= domestic and international projects. The company also facilitates = the implementation of various government-funded projects for the distributio= n of electricity to end-users, such as the Accelerated Power Development and= Reform Programme (APDRP) in urban and semi-urban areas and the Rajiv Gandhi= Grameen Vidhyutikaran Yojana (RGGVY) in rural areas.=20
INSIDE THE GRID Rs crore FY07 FY08E FY09E Transmission 3455.20 3898.00 4959.50 Others 4= 93.60 818.40 965.20 Total revenues 3948.80 4716.06 5924.80 Operat= ing profit 3867.17 4858.34 OPM (%) 82.80 82.00 82.00 Net profi= t 1295.21 1509.14 1895.94 NPM (%) 32.80 32.00 32.00 Book value (= Rs) 30.16 33.50 38.00 P/BV@ Rs 44 1.46 1.33 1.20 P/BV@ Rs 52 1.= 72 1.54 1.50 EPS (Rs) 3.08 3.50 4.50 PE (x) @ Rs 44 14.30 12.20= 9.70 PE (x) @ Rs 52 16.90 14.50 11.50 Figures for the year FY08 a= nd FY09 are indicative based on the new capacities and transmission realisat= ion per MVA. Analysts estimates Telecom With its own overhe= ad transmission infrastructure in place, the next logical step for Power Gri= d was to create a fibre optic cable network on this backbone. The company ow= ns and operates a fibre optic cable network of over 19,000 km and connects o= ver 60 Indian cities.
The company leases bandwidth on this network to more than 60 customers, incl= uding major telecom operators such as BSNL, VSNL, Tata Teleservices, Relianc= e Communications and Bharti Airtel. This is the fastest growing business; it= grew 106 per cent in FY07 y-o-y to Rs 77 crore. Since this business is new,= it made losses till FY07 but has good potential. “We expect the trend to ch= ange from FY08 as the initial investment stage is over,” says, Misal Singh, = analyst, Edelweiss Securities. Valuations At the lower end= of the price band of Rs 44, Power Grid is priced at 1.3 times estimated FY0= 8 book value and 1.2 times FY09 book value. At the upper end of Rs 52, the i= ssue will be priced at 1.55 times estimated FY08 book value and 1.5 times FY= 09 book value. Compared with the price-book value ratios of NTPC, T= ata Power and Reliance Energy, which are trading at well above two times FY0= 8E book value, Power Grid is cheaper. While valuing the company, some analysts also use the discounted cash flow approach.
“We have a DCF value of Rs 62, which is 20 per cent higher then the price at= the upper band” adds Edelweiss Securities’ Singh. Based on the price-earnin= gs multiple, the issue is priced at 13-15 times FY08 and 9-11 times FY09 ful= ly diluted estimated earnings. Power Grid provides a good opportunity for in= vestors to capitalise on the infrastructure growth story.
Safe Harbor Statement: =20 Some forward looking statements on projections, estimates, expectations & ou= tlook are included to enable a better comprehension of the Company prospects= . Actual results may, however, differ materially from those stated on accoun= t of factors such as changes in government regulations, tax regimes, economi= c developments within India and the countries within which the Company condu= cts its business, exchange rate and interest rate movements, impact of compe= ting products and their pricing, product demand and supply constraints. =20 Nothing in this article is, or should be construed as, investment advice.= =20 =20 =20 =20 =20
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