November promises to be an exciting time in the primary market, with Reliance Power and Emaar MGF set to enter with mega-IPOs. But for now, all eyes are on the upcoming listing of Power Grid, whose issue was well subscribed, including by yours truly.
A Mini-Ratna and India's principal power transmission company, Power Grid Corporation (PGC) owns and operates most of India's interstate and inter-regional electric power transmission systems. It made its IPO with the primary objective of funding its transmission projects even as the Government of India divests its stake. During FY07, the company transmitted approximately 298 billion units of electricity — about 45 per cent of the aggregate power generated in India.
Among its positives, it is noteworthy that the average system availability maintained by PGC since FY02, approximates 99 per cent. Transmission losses, approximating 4 per cent, too were primarily technical in nature.
Further, PGC has leveraged on its overhead transmission infrastructure, and diversified into telecommunications. It owns and operates a fibre-optic cable network of over 19,000 kilometres and leases bandwidth to the likes of BSNL, Reliance Communications and Bharti Airtel, among others. Notably, this segment of its business has turned profitable during Q1 of FY08. Similarly, while PGC has ongoing commissioning on transmission assets, what could boost its immediate prospects is the fact that four of these projects are scheduled to be commissioned in FY08.
On the flip side, PGC is a PSU and operates in a highly regulated industry. Similarly, while a regulated ROE of 14 per cent (excluding North-east India) guarantees healthy bottomline growth, historical evidence suggests that the company is particularly vulnerable to changes in the current tariff policy by the Central Electricity Regulatory Commission.
Overall then, the scales are clearly tipped towards the positive and with the financials reflecting good health, the spotlight shifts to pricing. Whereas a back of the envelope calculation suggests that PGC could end up with an EPS of over Rs 4 for FY08, a closer scrutiny of the numbers indicates that translation gains have boosted PGC's bottomline by deflating its Q108 interest cost.
Nevertheless, even if one were to revise the EPS estimate down below Rs 3, the P/E of approximately 18 passes muster. This is not only because PGC will set its own benchmark in the absence of comparable listed peers in the Indian market, but also because its relative monopoly will remain, given the capital and technology intensive nature of its business.
To buttress this assumption, consider this: PGC proposes to invest Rs 55,000 crore on transmission infrastructure during the tenure of the Eleventh Five Year Plan with the objective of increasing its inter regional capacity from 14600 MW to about 37000 MW. As the only listed power transmission play on the Indian bourses, an investment in its shares holds out the promise of powering the portfolios of retail investors with a long-term perspective.
The writer is CEO, Lotus Knowlwealth, a knowledge based consulting firm.