Power Grid Analysis
The company makes a sterling debut on the bourses
The investor euphoria for the power sector was clearly visible with the Power Grid Corporation of India listing on the bourses at Rs 85 as compared with the issue price of Rs 52.
The stock hit an intra-day high of Rs 109 before closing at Rs 100. The stock trades at 29 times estimated FY08 earnings and 22 times estimated FY09 earnings.
The company raised Rs 2,984 crore in its initial public offering by selling 573.9 million shares at the upper end of the price band.
Power Grid, the largest transmission player in the country, plans to use the funds raised to expand its transmission capacity to 92,875 km and 91,942 MVA (mega volt-ampere) from 61,875 km and 61,307 MVA respectively at the end of June 2007 quarter.
The PSU player is assured of cost plus 14 per cent return on equity for its power business. In addition, Power Grid plans to ramp up its existing 19,000 km of optical fibre cable network, which is used by telecom operators such as VSNL and Reliance Communications, in the next few years.
The investor sentiment towards the energy sector has also been aided by the announcement of a public issue by Reliance Power. The company, promoted by Reliance Energy, recently filed the draft red herring prospectus to sell 1.3 billion shares.
With the domestic power generation capacity expected to go up from 132,329 mw in FY07 to 219,992 by FY12, investors are keen to leverage the long term growth prospects of this sector across generation, transmission and distribution. Equipment manufacturers, which rallied ahead of the power companies, seem to be taking a breather though.
Meanwhile, the stock of Reliance Energy has gained around 23 per cent since the board meeting held on September 30 and a whopping 75 per cent over the past month.
At Rs 1447, the stock trades at over 37 times estimated FY08 earnings. Even Tata Power has gained 10 per cent in the past week and 32 per cent over the past month, and trades at 32 times estimated FY08 earnings.
Although the market has re-rated the power sector, it will be difficult for these companies to generate equivalent earnings growth rate to justify the high P/E multiples at least over the medium term, according to analysts.
By: Niraj Bhatt & Amriteshwar Mathur / Mumbai October 06, 2007
