Power Grid FPO – Nov 2010

While all analysts and reporters are talking endlessly about Power Grid FPO in the shadow of the Coal India IPO, see link,

I wonder if anyone has given thought to the risks around this offer :
· High Debt – at around 37k crores (March 2010), debt is high. The D/E ratio is 2.18. And one of the purposes of this FPO is to raise additional equity and reduce the D/E ratio, and at a later stage, also raising additional Debt. Much of the debt is from low cost funding agencies. However it has to be repaid eventually, right?
· Dilution of Equity – dilution of 10% by fresh issue available and being offered in this FPO. This means that EPS will fall proportionately, so a Rs 105 stock (at constant PE and earnings) should fall to 94.5 Rs post FPO.
· Underperformance of stock compared to Sensex – see graphic attached. Over last 2 years, PGCIL has underperformed the Sensex.

· Limited upside – Returns are capped; performance of PGCIL depends on energy generation by power plants, and there have been delays in commissioning of power gen plants.
· Past year has seen a go slow in awarding of projects for setting up transmission lines (I own KEC International, a downstream EPC firm. Thats another story).
Comparisons with Coal India are difficult to defend, even though there is a public sector monopoly –
· This is a highly capital intensive sector
· Derived Demand – PGCIL revenues are derived from the performance of power generation plants.
I would say a more balanced view is required.
· FPO is 10 times oversubscribed yesterday – this is a good sign.
· Expectations are that several projects of this company will be commissioned in the next few months, this will drive up revenues and profits
Personally I would like to nibble at this FPO, rather than take a large bite. If you have a Core and Satellite portfolio, this can be a small, defensive, market performer holding.