Power has been the market’s blue-eyed boy for the last many weeks. Whether it’s utilities like Reliance Energy and Tata Power, generation companies like NTPC and Neyveli Lignite or ancillary manufacturers, all stocks have rallied significantly.
While the sector has very good growth underpinnings, at least part of the recent excitement can certainly be attributed to the Power Grid IPO, which opens on Monday. It’s a meaty Rs 3,000 crore float and will create a $5 billion entity on listing. Just the right size, which will get the big institutional investors excited.
Power Grid is a solid, stable power sector play. It is India's principal power transmission utility, a virtual monopoly. Returns are regulated so it may not be the most exciting stock to own, but as investors have found out, some of these “regulated” return entities like NTPC can generate solid returns as well, particularly when the sector is in fancy. It’s return on equity too of around 11 per cent is not the best you can find in the sector.
However, it's a low-risk, steady-return kind of business model. The environment is very conducive. Investors are betting big-time on strong, visible growth in the entire power infrastructure space and in that context a transmission monopoly makes a lot of sense.
Valuations are reasonable too. Even at the higher end of the 44-52 price band, the issue is available at a Price to book (P/BV) of 1.6, a discount to sector peers like NTPC and Tata Power, which trade between 2.3 to 3.
Even in terms of PE multiples it comes at 14 times FY08 earnings, while peers trade in multiples ranging between 20 and 24. Sure, business models are not strictly comparable and Power Grid’s return ratios are poorer, but even so from the price of 52, it appears the government has left at least 20 per cent on the table for IPO investors.
That should be good enough to draw the money in.
(The writer is Executive Editor, CNBC-TV 18)