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UBS Investment Research
Power Grid Corporation of India
FPO price band fixed at Rs85-90/share
FPO priced at a minimum 10% discount to Thursday closing price
Power Grid’s follow-on public offer (FPO) is opening on 9th November 2010 in
which the company plans to raise 10 per cent fresh equity, while the Govt of India
is likely to offload 10 per cent of its current 86.36 per cent stake. At the announced
price band of Rs85-90/share, the money to be raised is in the range of Rs72-76bn.
This is at a significant discount (~15%) to last three months’ average stock price.
Good investment opportunity for long-term investors
We believe this FPO is a good investment opportunity for long-term investors. The
key reasons are, a) Execution and capex are largely in-line with established targets;
b) ~15% growth in short-medium term is not at risk, c) Valuations are attractive at
FPO price band levels. Please refer to our note FPO in November second week
dated 29th October 2011.
We are positive on Power Grid as a defensive investment
Power Grid is the government-appointed central power transmission utility. We
think it will be a key beneficiary of growth in the transmission sector; it has more
than a 50% market share and we expect this to increase. In our view, Power Grid’s
leadership position in the sector is likely to remain unchallenged. This combined
with the low risk nature of business makes it a good defensive exposure in Indian
Power Sector.
Valuation: Buy rating and price target of Rs135
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool, assuming 10.1% WACC.
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