Power Grid Corporation of India Limited

Transcription

1 Nov, 2010 Power Grid Corporation of India Limited ANS Research Desk (Research Wing of ANS Pvt Ltd) ARHAM Financial Centre Harihar Chowk, RAJKOT (Guj) Speak to: Drop a line to: research@anspl.net

2 Issue Details Sector Power Transmission Issue Size ` 7576 Crores No. of Shares Crores QIBs * 419,189,323 Non-Institutional* 125,756,797 Retail* 293,432,526 Employees 3,389,600 Face Value ` 10 Price Band `85 - `95 BRLMs SBI Capital Markets Ltd. Goldman Sachs (India) Securities Pvt. Ltd ICICI Securities Limited J.P. Morgan India Pvt. Ltd. Registrar Karvy Computershare Pvt. Ltd. Website: * Minimum allotment Recommendation - Subscribe Timeframe Minimum 12 months Since this is an FPO it has not been rated by any Rating Agency Financial Highlights Particulars Mar-10 Mar-09 Mar-08 Mar-07 Net Sales (In Cr.) Operating Profit (In Cr.) 6,759 6,486 4,499 3,763 PAT (In Cr.) 2,040 1,690 1,448 1,229 EPS Total Assets (In Cr.) 52,771 45,473 37,714 31,491 Cash & Bank (In Cr.) 3,277 2,428 1,865 1,196 Book Value/ Share Particulars Mar-10 Mar-09 Mar-08 Mar-07 PBIDTM (%) PATM (%) ROE (%) ROCE (%) D/E (x) Net Sales Growth (%) PAT Growth (%) Interest Coverage Ratio Prepared By: Pranav Mehta

3 Background & Company Information PowerGrid is a central transmission utility (CTU) of the country and is engaged in power transmission business. The company was ranked as World s 3 rd largest transmission utility by World Bank in January The company owns and operates nearly 95% of India s interstate and inter-regional electric power transmission system (ISTS). As of September 30, 2010 the company owned and operated circuit kilometers of electrical transmission lines and 132 electrical substations. In fiscal 2010 the company had transmitted nearly billion units of electricity which represented 47% of all the power generated in India. As of September 2010 the company has managed to increase the electricity transmitted to billion units which was nearly 51% of total power generated in India. Transmission losses for the company are 2-3% mainly due to Technical faults and difficulties. The company has been conferred with the Navratna Status by the Government of India since May As of Sep 2010 PowerGrid had assets of worth ` Crores. It has MVA Transformation Capacity, MW Interregional Capacity and Telecom NLD with Km Optical Fibre network. For the year 2010 the company has been awarded with the No. 1 PSU in the country and it would be receiving this award in December. Moreover according to one of the surveys done recently the company has been identified as the 8 th Fastest growing company in Asia. Moreover PowerGrid is the only power transmission company of its size in the world which is listed on stock exchanges. From April 2007 to September 2010 the PowerGrid has completed 32 transmission projects valued to nearly ` billions. As of September 2010 the company has spent nearly `291.2 billions towards investment in transmission projects for the 11 th Five year plan. PowerGrid has also diversified into providing transmission related consultancy services and has provided its services to nearly 115 clients in over 330 domestic and international projects. Currently the company is providing consultancy services to its clients in 75 domestic and international projects. Its revenues from consultancy business

4 last year was Rs. 260 Crores. Its clients are from SAARC countries and Middle Eastern countries. The Company has also diversified into Telecommunications business wherein it Leases out its free fiber optic cables to give bandwidth to Telecom operators. As of Sep 2010 PowerGrid is having an optical fiber network of Kms connecting 129 Indian cities and has significant presence in remote and rural areas of India. The company possesses transmission towers. It has been leasing out bandwidth to 70+ clients which include names like Bharti Airtel, Bharat Sanchar Nigam Limited, National Informatics Centre, Dishnet Wireless Limited and Tata Communications Limited. Source: RHP Particulars months ended September 30 Transmission Network (circuit kilometers) Substations (number) Transformation Capacity (MVA) System Availability (%) Source: RHP

5 Map illustrating the locations of PowerGrid s completed projects Source: RHP

6 Power Industry Overview: According to CIA fact book India has been ranked as the World s 5 th largest energy producing nation in the World with estimated Total production of 723 billion KWh. It is also the world s 5 th largest energy consuming nation with estimated total consumption of 568 billion KWh in The demand for electric power transmission directly depends on electrical power demand and supply. The per capita Electricity consumption in India in 2008 was nearly 566 KWh which is one of the lowest among developing and developed nations and also way below the world average of 2782 KWh. Per Capita Electricity Consumption (kwh) in 2008 World Avg. India OECD Japan China USA (Hundreds of KWh)

7 Projected Energy Demand in India for next 12 years Year Electricity Energy requirements at power station bus bars (GWh) Annual Peak Electric Loan at power station bus bars (MW) India has been facing a peak power shortage for quite sometime now. We can see this in the following chart: Period Peak Demand (MW) Peak Met (MW) Peak Deficit (MW) Peak Deficit (%) In order to achieve a sustained economic growth rate of 8.0% through India needs to increase its primary energy supply by 3 to 4 times and its electricity generation capacity by 5 to 6 times based on FY2004 levels. With FY2004 as a baseline, India s commercial energy supply would need to grow from 5.2% to 6.1% per annum while its total primary energy supply would need to grow at 4.3% to 5.1% annually. By FY2032, power generation capacity must increase to around 800,000 MW from FY2004 capacity of around 160,000 MW inclusive of all captive plants. (Source: Planning Commission, Integrated Energy Policy Report of the Expert Committee, August 2006).

8 Power Transmission in India The average investment in Transmission and Distribution in India during the 10 th 5 Year plan has been around 32% of total investment in power generation (Source: Ministry of Power, Report on the Working Group on Power for Eleventh Plan ( ). A Transmission & Distribution system consists of transmission lines, sub-stations, switching stations, transformers and distribution lines. India currently has a 3-tier structure in T&D system wherein distribution networks and state grids are owned and operated by SEBs and other state utilities or state governments while the interstate and inter-regional transmission lines are owned and operated by PowerGrid or its joint ventures. With the strengthening of inter-regional connections by 2012, the inter-regional capacity is expected to grow to 27,950 MW by the end of the Eleventh Five Year Plan, according to the Planning Commission s Mid-Term Appraisal of the Eleventh Five Year Plan. The CEA anticipates that inter-regional transmission capacity would be on the order of 57,000 MW by 2015 and 75,000 MW by the end of the Twelfth Five Year Plan. The actual increase in transmission capacity will depend on corresponding growth in generation capacity. (Source: CEA, Key Inputs for Accelerated Development of Indian Power Sector for 12th Plan & Beyond). Transmission Capacity Existing as at Sep 2010 (ckm) Targeted Capacity under 11 th Plan (ckm) 765 kv HVDC Up to 500 kv kv /222 kv Total Source: RHP (CEA, Monthly Review of the Power Sector, September, 2010; CEA, Key Inputs for Accelerated Development of Indian Power Sector for 12th Plan & Beyond)

9 Positive points for the company A Monopolistic Business PowerGrid owns and operates more than 95% of India s ISTS. As of Sep 2010 about 51% of total power transmitted in the country was through PowerGrid s transmission networks. It currently operates circuit kilometers of interstate transmission lines, 132 EHV AC and HVDC sub-stations with transformation capacity of about MVA. Going forward also the management is quite confident that they will be able to maintain their leadership position and would be the major suppliers of electric power throughout India. Maintains one of the best Operational Efficiencies among Global players PowerGrid has maintained an average availability of over 99% for its transmission systems since FY 2002 and did not have any major Grid disturbance anywhere across the country for the last 7 years. The company has included state of the art operation and maintenance measures like live maintenance using helicopters to clean polluted insulators and establishing Emergency Restoration Systems for restoring collapsed transmission lines. Tripartite agreements with the government related to recovery of dues The company enters into a tripartite agreement with various state governments or the central governments (in some cases) so that it does not face any difficulties in recovering its dues in case the STU s fail to pay up due to any liquidity problems. This assures the company of receiving regular revenues without having to go for too many write downs on its books. Even the bonds that it had received during the one time settlement with many STU s a few years back are protected from downside due to the guarantees provided by various state governments and

10 according to management some of them have already paid up their dues and redeemed the bonds. Diversification into high margin Consultancy services and Value creation through its Tower Business PowerGrid has been diversifying its business into providing consultancy related to Power transmission to many companies across the World. This is a very high margin business and it is also not regulated very much and does not face interventions from government or CERC. Going forward this would provide good growth opportunity to the company if it continues to deliver good services to its clients. The company has also recently floated a tender for leasing of some of its Telecommunication towers (in the states of Punjab, Haryana, Himachal Pradesh and Jammu and Kashmir) for which many of the Telecommunication players operating in India are eligible to bid. PowerGrid currently has about towers and has free optical fiber cable network which it leases out to Telecom players for their bandwidth requirements. The company is carrying out a pilot leasing project in collaboration with a service provider in the Gangtok area. It is also planning to diversify into value added services such as MPLS-VPN. We think that this would create good shareholder value in the coming years since Telecommunication itself (3G and 4G) is going to show good growth in the coming future. Source: Company RHP and ANS Research

11 Concerns/Risks Huge Capex may deteriorate D/E ratio and profit margins for next few years PowerGrid plans to spend nearly Crores under the 11 th 5 year plan which is expected to increase to nearly 1lakh Crores in the 12 th 5 year plan. This would require substantial borrowing on the part of the company since the company follows 70:30 (Debt: Equity) model in all its projects. Though the management says that they are able to pass on the increased interest costs to its customers it is quite possible that the interest costs due to the increased borrowings may weigh down on company s profits for some more years. Getting approval and clearances from Environment Ministry and Challenges faced in Land Acquisitions PowerGrid has been facing some problems in its expansion plans due to delays in Environmental and Forest Clearances. Land acquisitions have also been a major problem for the company particularly in the Naxal affected areas. However the Management is confident that they will be able to obtain all the required permissions due to Government s support and backing. Government Interventions and highly Regulated Industry PowerGrid is promoted by the Indian Government and as with any PSU it faces a risk that Government may take some populist decision which may prove to be detrimental to the company s operations. Moreover the power industry is a highly regulated industry with CERC playing the main regulator. The fixed tariffs decided by CERC does not help PowerGrid obtain the true pricing power which any private player can obtain under a free industry.

12 Negative Impact of Proposed Sharing of Inter state Transmission Charges and Losses Regulations 2010 CERC had framed the sharing of inter state transmission charges and losses regulation 2010 in June These regulations are supposed to come in force from January 1, 2011 for a period of 5 years. It is proposed to implement a point of connection method for sharing the transmission charges for the inter-state transmission system in India, replacing the present method of regional postage stamps. These regulations provide that the yearly transmission charges, revenue requirement on account of foreign exchange rate variation changes in interest rates and losses will be shared amongst the users, including larger generating stations, state electricity boards, state transmission utilities, bulk consumers connected directly with the inter-state transmission system and any designated entity representing a physically-connected entity listed above. Under these regulations the company has been made responsible for billing, collecting and disbursing transmission charges from all users of ISTS. Though the management says that these regulations would be revenue neutral and will not have any major impacts there are chances that the company may not be able to collect charges from the users which would result in hampering of operations and negative effect on company s profit margins. Source: Company RHP and ANS Research

13 FINANCIAL HIGHLIGHTS Balance Sheet (Consolidated Results) (` In Crores) Particulars Mar 2010 Mar 2009 Mar 2008 Mar 2007 Share Capital 4, , , , Total Reserves 11, , , , Total Debts 36, , , , Sundry Debtors 2, , , Cash & Bank Bal 3, , , , Total Assets 52, , , , Book Value Source: Company RHP Profit & Loss (Consolidated Results) ( ` In Crores) PARTICULARS Mar 2010 Mar 2009 Mar 2008 Mar 2007 Net Sales 7, , , , Other Income Total Expenditure Depreciation 1, , Interest and bank charges 2, , , , Tax PAT 2, , , , Dividend (%) Source: Company RHP

14 Cash Flow (Consolidated Results) ( ` In Crores) PARTICULARS Mar 2010 Mar 2009 Mar 2008 Mar 2007 Operational Cash Flow 6, , , , Investment Cash Flow -9, , , , Financing Cash Flow 3, , , , Net Cash Inflow/Outflow Opening Cash & Equivalents 2, , , Closing Cash & Equivalents 3, , , , Source: Company RHP

15 RECOMMENDATIONS Valuations (Standalone) Price Band EPS* BV# P/E P/B.V *- as on March 2010 PowerGrid has an excellent track record and good execution capability related to big power transmission projects. The company currently enjoys a monopolistic business in India and we believe that it would continue to do so in the future as well. It enjoys high operating profit margins from both its core business of power transmission and also from its non transmission businesses. The company has stable cash inflows which are expected to continue in the future as well. The only concern is its regulated business and higher expected D/E ratio due to the huge capex plans which the company has lined up for next 5-6 years. However looking at the future Power Sector scenario in India and its monopolistic business we would recommend a SUBSCRIBE to this issue with a Long term view. # - as on March 2010 Note: For the 6 months ended on September 2010 the company was having an EPS of ` 3.22 and Book value per share of `

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