The pricing, which makes this the second largest IPO by an Indian company this year after property developer DLFÆs $2.4 billion deal in June, came as no surprise after the deal was close to 65 times covered overall. The Indian stockmarket has also continued to head higher since the company set the price range, making Power GridÆs valuation relatively more appealing. Since the launch of the roadshow on August 29, the benchmark Sensex index has gained 4.6%.
The offering was also regarded by some observers as a classic low-risk defensive stock with a stable income from its core operations and a monopoly position in terms of inter-regional transmissions that could offer investors a relative safe haven in times of market volatility û like the once we are seeing at the moment. Power Grid is IndiaÆs leading electric power transmission company and before the IPO it was 100% owned by the government.
As usual it was the qualified institutional buyers (QIB) who were the most keen on the IPO, with this portion of the deal more than 115 times subscribed at the end of the four-day book-building. Excluding the 13.98 million shares that were reserved for company employees, the QIB portion accounted for 50% of the total deal. The 35% retail tranche was 6.8 times covered, while the 15% tranche for non-institutional investors attracted bids for 40 times the amount of shares available.
The company owns virtually all of IndiaÆs national power grid and is responsible for the transmission of about 45% of all the power generated in the country, which makes it one of the major players in IndiaÆs fast growing infrastructure story. (Most of the remaining power flows in state grids that are owned by the respective state governments.)
Power Grid sold 13.6% of its enlarged share capital in the form of 573.9 million shares, of which two thirds were made up of new shares. The remaining third were existing shares sold by the government which will see its holdings fall to 86.4% post-issue.
Citi, Enam Securities and Kotak Securities were joint bookrunners for the offering.
The final price values Power Grid at 1.7 times its estimated book value, which suggests a 25%-30% discount to IndiaÆs largest power generator NTPC Limited, which trades at 2.1-2.2 times book. One source notes that government-controlled NTPC, which went public in 2004, is expected to post higher growth rates than Power Grid over the next three years, which suggests this valuation gap is warranted.
The Indian power generators as a group, including Reliance Energy and Tata Power, trade at an average P/B multiple of about 1.9 times, although many of them also have other businesses which sources say makes them less valuable as a benchmark.
As of March 2007, Power Grid had 48 transmission projects in various stages of implementation and subject to government approvals it plans to spend Rs550 billion ($13.4 billion) on new transmission capacity in the five years to March 2012. The goal during this five-year period is to increase the inter-regional power transfer capacity in the national grid to more than 37,000 megawatts from 13,700MW today.
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