Powergrid

Power Grid Corporation of India is entering the primary market on 3^rd December 2013 through a further public offer (FPO) of 78.71 crore equity shares of Rs.10 each, comprising of fresh issue of 60.19 crore shares and an offer for sale of 18.52 crore shares by Government of India (GoI), both in the price band of Rs. 85 to Rs. 90 per share, with 5% discount to retail investors and employees, on the discovered price. The issue represents 15.04% of the company’s fully diluted post issue paid-up capital and will raise Rs. 6,572 crore and Rs. 6,959 crore at the lower and upper price band, respectively. To be listed on NSE and BSE, the issue closes on 5^th December for QIB bidders and on 6^th December for HNI and retail category.

India’s principal electric power transmission company, Power Grid owns and operates more than 90% of India’s inter-state and inter regional electric power transmission system with 102,109 circuit km of electrical transmission lines and 172 substations with transformation capacity of 172,378 MVA. Company reported revenue of Rs. 7,559 crore and PAT of Rs. 2,280 crore for H1FY14, resulting in EPS of Rs. 4.91 on an equity of Rs. 4,630 crore.

As of 30^th September 2013, its balance sheet is highly leveraged with Rs. 76,351 crore of debt, on networth of Rs. 28,519 crore, indicating a high debt equity ratio of 2.7:1. Debt has nearly doubled in the last 30 months, which stood at Rs. 38,666 crore as of 31^st March 2011, when the debt equity ratio was still high at 1.8:1. Going forward, with no fireworks likely in the power generation sector, this power transmission company cannot hope for any bright future and the balance sheet stress in the form of mounting debt will continue.

Current Shareholding pattern, as of 30^th September 2013, reveals that GoI owns 69.42%, which will decline to 57.89%, post FPO. FIIs hold 16.87%, which has increased from 14.66% as of 30^th June 2013. Thus FIIs have already increased their holding in the company and are not likely to be too gung-ho on the FPO, as their appetite has largely been met from secondary market purchases during the July-to-September quarter.

Turning back the pages of history, the company had made its debut on the Indian stock markets in September 2007 via an IPO at Rs. 52 per share and had a bumper listing at Rs. 89.80 on NSE on 5^th October 2007. Post listing, on 16^th November 2007, share had touched a high of 167.50, which is also its life time high. Considering the current market price of Rs. 94 per share and annual dividends, from its IPO price, the returns have been 12.3% CAGR in 6 years, which is the kind of return expected in fixed income instruments and not the risky equity class.  Those who bought the stock in the secondary market at or about Rs. 150 share in the year 2008 are seen to be big looser, inspite of a wait of about 6 years!

Then again in November 2010, the company made its first FPO of 10% stake (plus 10% by Government) at Rs. 90 per share and is doing so at the same price after 3 years too! This is not some charity or investor friendly move on behalf of the company, but just its compulsion and Government’s desperation to meet FY14 divestment target of Rs. 40,000 crore. Including dividends paid by the company, the first FPO has given an annual return of just 3.8% in last 3 years! Thus the company has failed to “rewarded shareholders” in the last 3 to 6 years. No hopes remain for the ensuing FPO to create any shareholder wealth either!

At the upper price band, the FPO aims to garner Rs. 5,321 crore for the company, while GoI will get Rs. 1,637 crore. This is a sizeable amount. PSU companies have had poor track record on the bourses. They are no longer considered the ‘safe havens’ for equity investing by Indian retail shareholders.

The Power Grid FPO is thus not exciting and remains an ‘avoid’ based on the fundamental analysis for a longer horizon. However, retail investors can chalk an equity-cum-futures strategy, to gain from the FPO.

Suggested strategy:

1. Apply for 2,100 shares in FPO (as lot size 150 shares), on which, discount of 5% on issue price (being Rs. 4.50 per share calculated on upper band of Rs. 90 per share) shall be given, resulting in net cost at Rs. 85.50 per share. So, pay Rs. 1,79,550 as application money.
2. Entire 2,100 shares are likely to get allotted to retail investors. In anticipation of this, sell December Futures 1 lot of 2,000 shares (market lot) at Rs. 91.60 per share, which will hedge them against the expected allotment of equity shares. (January series Futures lot is 4,000 shares). Note that margin of about Rs. 40,000 will have to be paid on selling this 1 lot in futures.
3. Thus, a profit of about Rs. 12,500 per application can be expected, with balance 100 shares being retained in the hands of the retail investor.
4. Alternatively, one can also sell the retail application at around Rs. 5,600 per share, irrespective of the fate of final allotment. For this, one has to contact his/her broker.