Powergrid Corp India Limited FPO

FPO Issue Details 3rd Dec 2013

Powergrid is coming out with a follow on Public Offer of 787,053,309 equity shares of face value of Rs 10 each. The offer comprises of a fresh issue of 601,864,295 equity shares and an offer of sale of 185,189,014 equity shares by Government of India, which presently holds 69.42% of the paid up capital of the company. The offer comprises a net offer of 784,053,309 equity shares and a reservation of 3,000,000 equity shares for subscription for its employees.
The Price band is Rs 85 to Rs 90 per equity share, Bids can be made for a minimum of 150 equity shares and in multiples of 150 equity shares thereafter. Also a discount of Rs 4.50 to the offer price is being offered to retail individual investor and eligible employees bidding in the employee reservation portion.
The FPO Bids open on 3rd December, 2013 and Bid close on 5th December, 2013 for Qualified Institutional Buyers bidders and on 6th December, 2013 for all other bidders.

BUSINESS BACKGROUND OF POWRGRID
Power Grid Corporation of India Limited (PowerGrid) is a Navaratna Central Public Sector Enterprise, a Central Transmission Utility (CTU) of India and Indias largest Electric Power Transmission Utility.
PowerGrid is in the business of power transmission, consultancy and telecom. Company owns 173 subsidiaries and having 102,540 km transmission lines, 176,323 MVA transformation capacity and approx. 32,000 MV inter-regional capacity. In addition, it provides transmission related consultancy to more than 145 domestic clients and has global presence in 14 countries catering more than 20 clients. Further, in telecom business it owns and operates approx. 29,279 km of telecom network, present in approx. 290 locations and has intra city network in 68 cities across India. The company has been paying dividend since 1993.
On a consolidated basis, the companys gross fixed assets, revenues and net profits have grown from Rs 35,205.6 million, Rs 6,340.6 million and Rs 2,366.1 million respectively in Fiscal 1993 to Rs 823,264.4 million, Rs 137,271.2 million and Rs 43,126.1 million respectively in Fiscal 2013.
The companys tariff is based on a cost-plus-tariff structure, which is determined by the CERC, in accordance with the Electricity Act as amended and the Fiscal 2010-2014 CERC Regulations, provides it a return on equity on pre-tax basis at a base rate of 15.5%

FINANCIAL HIGHLIGHTS
In Fiscal 2013, Powrgrid generated a total income on a consolidated basis of Rs 137,271.2 million and profit after tax of Rs 43,126.1 million. In Fiscal 2013, its revenues from transmission and transmission-related activities constituted 95.86% of its revenue from operations, with the balance coming from its consulting and telecommunication businesses.
On a standalone basis, in the six months ended September 30, 2013, it generated revenue from operations of Rs 75,594.5 million and profit after tax of Rs 22,795.4 million. Its revenues from its transmission and transmission related activities constituted 93.99% of its total revenue from operations for the six months ended September 30, 2013 (on a standalone basis). Its total income for six month period ending September 30, 2013 (on a consolidated basis) was Rs 77,384.6 million.

FINANCIALS
For the Year Ended
March RsCrs FY12A FY13A FY14E FY15E
Net Sales 10035.1 12527.5 15830.1 19050.0
EBIDTA 8382.4 10706.0 13830.0 16600.0
EBIDTA % 83.5 85.5 87.4 87.1
Interest 1943.3 2535.2 3830.1 4650.0
Depreciation 2572.5 3351.9 4160.0 5050.0
Non Operational Other Income 749.7 472.3 280.0 250.0
Profit Before Tax 4616.3 5291.2 6119.9 7150.0
Profit After Tax 3273.6 3880.8 4380.0 5109.0
Diluted EPS (Rs) 7.1 8.4 8.4 10.0

Equity Capital 4629.0 4629.0 5231.6 5231.6
Reserves 18858.1 21610.0 29180.0 32480.0
Borrowings 57031.0 70760.0 83140.0 95400.0
GrossBlock 63387.0 80600.0 98450.0 115940.0
Investments 1365.0 1284.0 1150.0 1150.0

KEY RISK FACTORS
Any changes to the current tariff policy or modifications of its tariffs norms by regulatory authorities including the Central Electricity Regulatory Commission (CERC) and Telecom Regulatory Authority of India (TRAI) could have an adverse effect on its business, financial condition and results of operation including through a reduction in its return on equity.
The companys current tariffs are expected to be applicable until March 31, 2014 and a new tariff norm is expected to come into force with effect from April 1, 2014 for a period of five years. In the event, that the current tariff norms change or CERC modifies its tariffs, its business, financial condition and results of operations could be materially and adversely affected. Any further downward revision of tariff by TRAI may have an adverse impact on the revenue to its telecom business.

In addition, the financial condition and results of the company may be affected by the amendments to the CERC (Open Access in Inter-State Transmission) Regulations, 2008. The CERC has now amended this regulation whereby with effect from September 11, 2013, the company is required to disburse the entire amount collected by it without retaining the 25% of the amounts so collected under short term open access. As a consequence, it no longer earns revenue from the transmission charges collected under short term open access by one of its subsidiaries, Power System Operation Corporation Limited (POSOCO). However, it has filed a review petition with the CERC against such amendment to the regulation and a hearing is awaited.

FUTURE OUTLOOK
Despite the above risk factors, the company has been enjoying the monopoly on power transmission in the country. The company has given a status of Navratna by the GOI in May 2008, which provides it a great autonomy to incur capital expenditure for its projects without the GOI approval and allows it to make investments in subsidiaries and joint ventures in India and abroad subject to an investment ceiling set by the GOI.
As at September 30, 2013, it had 86 ongoing transmission projects in various stages of implementation. It had budgeted an investment of Rs 1,000 billion in transmission projects during the Twelfth Five Year Plan, which began on April 1, 2012 and ends on March 31, 2017, which was further revised to Rs 1,096.8 billion to include new initiatives such as green corridors for renewable energy integration and projects under TBCB route. In Fiscal 2013, it has spent Rs 200,370 million towards investment during the Twelfth Five Year Plan.
For the six months ended September 30, 2013, it had spent 108,945.9 million (on a standalone basis) towards investment during the Twelfth Five Year Plan. The Twelfth Five Year Plan aims to achieve a national power grid with inter-regional power transfer capacity of approximately 65,550 MW, which would primarily include its transmission system.

RECOMMENDATION & OUR VIEW ON THE STOCK
We recommend investors to subscribe to the Powergrid FPO. At the upper end of price band, the stock is valued at 1.2x FY15E BV.. Valuation also looks reasonable for a business model with guaranteed RoE (15.5%), strong growth visibility and minimal operational risks.

With equity dilution overhang removed, stock price will be driven by fundamentals, which remain strong. We hence suggest a Subscribe to this follow on FPO of Powergrid with a medium to long term time frame.