Power Grid Corporation, one of India's largest public sector companies has come out with a “Further Public Offering” of 787 million shares to the public. The FPO closes today – 6th December. The purpose of this article is to review his issue and suggest whether you should subscribe to the issue.
About the Issue:
The offer comprises a fresh issue of 60,18,64,295 equity shares by the company and an offer for sale of 18,51,89,014 shares by government. The funds from this sale would go to the company. The offer opened a couple of days back on the 3rd December and closes today 6th December.
The price band for the issue is set at Rs. 85 to 90/- which will help the company generate around Rs.51 billion to Rs. 54 billion in funds depending on the price at which the offer is closed. A point to note here is that, “Retail Investors” get an extra 4.5% discount on the offer price.
About the Company – Power Grid Corp:
Power Grid Corp began operations in the year 1992 as part of the Government of India's initiative to consolidate all the interstate and inter-regional electric power transmission assets of the country in a single entity. It is currently India's principal electric power transmission company, and owns and operates most of the country's interstate and inter-regional electric power transmission systems.
The company also has a presence in the telecom sector, as it has created a network using its overhead transmission infrastructure. PGCIL has been leasing this network to telecom companies like BSNL, Tata Communications, Tata Teleservices, Reliance Communications and Bharti Airtel. The company also earns consultancy revenues. Income from these two businesses formed less than 5% of revenues during FY13.
Purpose of this issue:
Power Grid Corp is going to use this capital to meet its funding requirements for future projects. There are 27 projects in the pipeline which are a mix of generation linked and grid strengthening projects. The money raised from this FPO would be used for the same.
We have always been talking about the “Governments Divestment Program” wherein the Government sells its stake in government owned cos and this is one of the plans for 2013 coming to fruition…
Lot Size and Minimum Investment
The Lot Size for this issue is 150 shares which means, the minimum investment one has to make would be Rs. 13,500/- but, retail investors get 5% discount which means you need to invest a minimum of Rs. 12,825/-
Performance of Power Grid Corp – In the Recent Past:
Based on the results published by Power Grid Corp at the end of the last quarter the key numbers are:
Net sales rise by 28% YoY during 2QFY14.
Operating profits grow by 25% YoY during the quarter.
Profit before tax, when adjusted for extraordinary items and prior period items, grows in line with operating profits.
Net profits rise by 10% YoY (24% YoY after making adjustment).
This proves that the company has been able to post good profits…
What Should We Do – Should We Subscribe To The Issue?
Ok, now we are entering the god part. Should we subscribe to the issue?
As of now the stock is trading at around 10 times its trailing twelve month earnings. Even at the higher price band of Rs. 90/- per share the FPO is priced at around 1 time the company’s FY16 estimated book value.
Given the fact that Power Grid Corp has virtual monopoly in the interstate power transmission space, the company is in a strong position to capitalize on the growth prospects in power sector. The company has been able to take up expansion plans and execute them successfully. Even though some people find government co’s as Not-So-Well-Managed, I find Power Grid Corp as one of the exceptions.
Add in the 4.5% discount for retail investors, the FPO offer price is greatly inviting for us.
So, My Verdict is –
Disclaimer: Investing in stocks is risky. Even though Power Grid Corp is a good company, investing in this issue may result in losses in case the market tanks. The reader is advised to take into consideration his/her risk appetite before investing in this issue.