That the power sector is witnessing a flurry of activities is well known. The fact that there are tremendous investments coming into the sector is well documented. Not many people would know that while there is a shortage of power generation capacity, there is a larger shortage for transmitting it. Globally, every single cent invested in power generation requires a similar investment in transmission, the ratio of power generation to investment in T&D is 1:1, whereas in India it is 1:0.32 signifying a large gap.
Powergrid Corporation of India (PGCI), a designated Mini-Ratna Category-1 public sector undertaking, has a virtual monopoly in the power transmission and distribution business. And it now approaches the capital market to raise around Rs 2,462 crore to Rs 2,912 crore (price band Rs 44 to Rs 52) to initiate its plans to invest Rs 55,000 crore in transmission infrastructure in the next five years. This includes 45 projects currently being implemented by the company, which would increase its transmission lines by 30,536 circuit kms and transformation capacity of 29,420 MVA.
PGCI, despite being a monopoly, runs efficient operations. It has 99.50% system availability which is above the required norm of 98% system availability set for incentives. Moreover, its profitability is largely set by regulators at 14% return on equity.
Now, companies in the power sector typically see earnings remain steady as they generate or transmit a fixed capacity at a pre-decided tariff, which has a fixed RoE.
High earnings growth takes place when tariffs are raised or capacities are expanded. Now, PGCI plans to increase its transmission capacity from 61,875 circuit kilometres to approximately 91,875 circuit kilometres in the next five years.
The investments in transmission assets are going to rise from the present Rs 30,391 crore to Rs 85,391 crore, an increase of 281%. The RoE and the earnings growth is expected to rise in the same manner.
Apart from transmission, PGCI is also building up scope for non-power related revenues. This is also expected to boost its overall profitability. The diversification is in offering consultancy services to other generation and transmission companies.
The company has also leveraged its nationwide transmission system and right to way to create a fibre-optic telecommunication cable network of over 19,000 km connecting over 60 Indian cities. For FY07, revenues from consultancy and telecommunication business were 7.44% of total revenues worth Rs 4,082.3 crore.
From the valuation perspective, the offer price discounts the fully diluted FY07 EPS of Rs 2.9 by 18 times on the higher band and 15 times on the lower price band. Its price to book value (fully diluted) is around 1.7 and 2.0 times on the lower and higher band respectively. While there is no comparison yardstick available for PGCI, it compares fairly well with other profitable entities in the power sector.
Overall, as happens with most public sector companies and also companies in power generation, the ability to get projects executed and not get snarled up in delays, enables the company to show visible earnings. Same is the case with PGCI. Its ability to execute its plans will have a large bearing on the returns that investors get.