PGCIL FPO may sail through on attractive pricing: Analysts

Written by fe Bureau | Mumbai | Updated: Dec 3 2013, 09:55am hrs
The Street seems to be gung-ho about the follow-on public offering (FPO) of Power Grid Corporation of India (PGCIL), which opens on Tuesday, with analysts citing attractive valuations while recommending the issue to clients.

PGCIL on Friday fixed the price band of its FPO at R85-90 per share. A 5% discount from the top end of the price (R4.5) is being offered to retail investors and eligible employees. As per Mondays closing price of R93.40, the stock trades at 10.06 times its trailing 12-month earnings as against 12-14x for its global peers. Experts said the discount leaves a lot of room for investors to profit from the issue. Most brokerages that FE spoke to said the issue is likely to see strong subscription levels. On Monday, PGCIL shares ended R1.65 or 1.74% lower from the previous close. The stock has traded at an average price of R101.37 during the last six months, Bloomberg data shows.

Experts said the huge demand-supply mismatch in the power sector will lead to an increasing need to transmit and distribute power which would benefit PGCIL. According to a Central Electricity Authority report, in the year 2012-13, the country faced peak power deficit of over 12,000 mega watts (MW). Data showed that peak power demand stood at 1.354 lakh MW as against production of 1.232 lakh MW.

A senior company official said the issue had received a fantastic response during the roadshows in Hong Kong, Singapore, London, and several other European and American cities. Firstly, the price is attractive. Secondly, this (issue) is not an offer for sale (OFS). The market is aware that the company is raising money for the companys growth. These are the two aspects that are driving investors interest, said the official on the sidelines of PGCILs press conference in Mumbai on Monday. He added that existing shareholders were also willing to participate in the issue.

Interestingly, Bank of America Merrill Lynch (BofA-ML) has an underperform rating on the stock. PGCIL has been a consensus buy with 90% of brokers (Bloomberg). However, we believe an over-leveraged balance sheet, a risk to its structural long-term RoE and poor sector fundamentals can drive the stocks under-performance, stated Bharat Parekh, MD & head of infrastructure research including capital goods, E&C, power utilities, infra developers and renewable energy BofAML.

PGCIL aims to sell 78.70 crore shares via the FPO. The issue comprises a fresh issue of nearly 60.186 crore shares (13% of the existing paid-up equity) and simultaneous disinvestment of 18.52 crore shares (4% of existing paid-up equity) by the government. It intends to raise about R7,000 crore, of which the governments share is estimated at about R1,660 crore. Post the issue, the governments shareholding in the company will drop to 57.89% from 69.42%.

Experts also highlighted that the change in index weightage as a result of an increase in issue capitalization and free float will give a boost to PGCILs stock price. Post the issue, the stocks weightage in the BSE 100 index is expected to rise about 0.4 basis points (bps) to 1.03% due to a similar increase in the stocks investible factor.