Power Grid - a good bet; FPO Note; Subscribe: Edelweiss

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Power Grid Corporation of India (PWGR IN, INR 85-90, Subscribe)

n  ~INR 76 bn FPO: 50% offer for sale and 50% fresh issue

Power Grid Corporation of India (PGCIL) plans to issue 4.2 bn fresh shares, with the government selling another 4.2 bn shares from its stake, in the INR 85–90 / share (at 1.8x post issue FY12 book value) price range. The resultant INR 76 bn issue will dilute government’s stake in the company from 86.4% to 69.4%. 

n  Proceeds to fund INR 226 bn capex

The company intends to use the ~INR 38 bn raised to fund part of its Eleventh and Twelfth Plan capex. It has identified 13 projects (estimated cost INR 226 bn) of 19,081 ckm including transmission links for Sasan and Mundra UMPPs which will be funded with the FPO proceeds. All these projects are expected to be commissioned by FY13.

n  Twelfth Plan capex slated to be ~ INR 1.2 tn

Management has guided for Twelfth Plan capex of INR 1.2 tn, since 60% of 100 GW generation capacity expected in the next Plan period has already been ordered. Moreover, the government has entrusted PGCIL with the mandate of building transmission corridors for private sector generation projects (~48 GW) and 4-6 incremental UMPPs. This translates into INR 12.9 bn capex in FY11, INR 16.7 bn in FY12, and ~INR 200 bn annually thereafter.

n  Targeting 18% RoE due to higher telecom and consultancy revenues

PGCIL is expecting to build on its robust transmission business expertise by garnering consultancy business, both in India and abroad. Similarly, the company plans to leverage its transmission towers by providing wireline and mobile telecom connectivity services (pilot projects of which have been successful). Earnings from these may not be more than 10% of overall PAT, but could enhance RoEs to ~18-20% due to its low capital intensity.

n  Outlook and valuations: Bright prospects; recommend ‘SUBSCRIBE’

Based on the competitive landscape and PGCIL’s track record so far, we assume Eleventh Plan capex of INR 480 bn (~INR 120 bn each in FY11 and FY12), INR 860 bn between FY13 and FY17, and INR 1.09 tn between FY18 and FY22. With regulated RoEs including efficiency gains at 17% we believe there is limited earnings downside. Based on its monopoly status, short execution cycle of less than three years for a transmission project, and strong visibility/sustainability of earnings (~13% CAGR FY11-22E) we believe ~2x P/BV can be justified. Our post issue FY12E book value is INR 51.4, which translates into a fair value of INR 104/share. Even at the upper band of the FPO pricing of INR 90, we believe there is ~ 15% upside. Hence, we recommend‘SUBSCRIBE’ to the FPO.