India's Power Grid switches on marketing for $725 million IPO

The government-owned power transmission company has defensive qualities that could make it appealing in the current volatile environment.
Power Grid Corporation of India, which is owned by the Indian government, will kick off marketing for an initial public offering today that seeks to raise between Rs25.3 billion and Rs29.8 billion ($615 million to $715 million).

The offering, which even at the low end will be the second largest IPO by an Indian company this year after property developer DLFÆs $2.4 billion deal in June, stands out since it is the only equity offering of this size that is being publicly marketed in Asia at the moment. At first glance this does seem like a brave endeavour given that many investors are still focused primarily on de-risking their portfolios.

As IndiaÆs leading electric power transmission company, Power Grid is, however, 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, making this perhaps a time as good as any to take it public.

ôIt is a predictable company that has more or less fixed returns of 14% on the equity that is deployed in its various transmission projects,ö notes one India-based power sector analyst not involved in the deal. ôIt is as good as a 14% bond, so to speak, with earnings growth from efficiency improvements and network expansion on top.ö

Over the past four sessions, the Indian equity market has also joined the rest of the region in a recovery that has seen it regain just over half of the value lost during the four-week correction that began at the end of July. The recovery is more muted than in some other markets such as Hong Kong, which has regained 96% of the earlier losses, but India did also suffer less than most other markets during the downturn.

Sources close to the offering note that the initial feedback on the deal has been quite positive and since there is no way of knowing how the markets will look a few weeks from now, the arrangers of the deal felt they might as well go ahead.

ôI think people might avoid some of the smaller names, but given the position of this company there is a lot of interest,ö one source says.

That position includes owning virtually all of IndiaÆs national power grid and being responsible for the transmission of about 45% of all the power generated in the country, which makes Power Grid one of the major power players in IndiaÆs fast growing infrastructure story. (Most of the remaining power flows in state grids that are owned by the respective state governments.)

As of March 2007, the company had 48 transmission projects in various stages of implementation and subject to government approvals it plans to spend Rs550 billion ($13.4 billion) towards 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.

Power Grid is offering 13.6% of its enlarged share capital in the form of 573.9 million shares at a price of Rs44 to Rs52 apiece. Two thirds of this issue is made up of new shares, while the remaining third are existing shares sold by the government. The government will divest 5% of its current 100% holdings, but including the dilution from the new shares, its stake will fall to 86.4% post-issue.

After excluding 13.98 million shares reserved for company employees, 50% of the remaining net issue will go to qualified institutional buyers, 35% to retail investors and 15% to non-institutional investors including high net-worth individuals. Citi, Enam Financial Consultants and Kotak Mahindra are joint bookrunners for the offering.

According to sources, the top end of the IPO price range values Power Grid at between 1.4 and 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 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 may be warranted û especially since the current market environment is almost certainly requiring an IPO discount.

The Indian power generators as a group, including Reliance Energy and Tata Power, trade at an average price-to-book multiple of about 1.9 times, although many of them also have other businesses which makes them less of a direct comparable, sources say.

Aside from its leadership position in the power transmission sector, Power GridÆs strengths include a high operational efficiency. In the latest fiscal year to March 2007, it maintained a system availability rate of more than 99% and according to the preliminary offering document it has had no major grid disturbances since January 2003.

It also has a good track record in terms of the expansion of its network and the implementation of new transmission projects, which should appeal to investors who are looking for some growth on top of the stable transmission income. This track record together with its technical expertise has landed the company jobs as consultant on more than 200 transmission- and distribution-related projects both in India and abroad.

In a further diversification of its business, Power Grid (like other transmission company around the world) has also made use of its nationwide transmission system to build a fibre-optic telecommunications network by wrapping the fibre-optic cables around its overhead power lines. As of March this year, this telecom cable network stretched more than 19,000 kilometres and connected over 60 Indian cities, including all the major metropolitan areas.

At present it is leasing this capacity to more than 60 customers, including major telecom operators such as Reliance Communications and Bharti Airtel, but Power Grid does have a license to provide telecom services of its own to end users and it is currently exploring the option to do so, it says in the preliminary listing document. In fiscal 2006, revenues from the non-transmission segment accounted for about 6% of its total top-line income of Rs35.5 billion ($865 million).

The books will open on September 10 and close on the 13th.
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