Power Grid - Long Term Investment

Introduction :

Power Grid Corporation of India Ltd (PGCIL) was incorporated in 1989; PGCIL is the largest power transmission utility in India, with the Government of India holding an 86% stake. Co share price was listed in 2007 with offering price of Rs 52 per share. PGCIL is the largest player in inter-state transmission of power. As of Sept 2010 the company owns and operates more than 95% of India's interstate and inter regional power transmission systems with 79,556 ckms of transmission lines. It has 132 substations with a transformation capacity of 89,170 mega volt amperes (MVA). Around 50% of total power generated in the country is wheeled through PGCIL transmission network. PGCIL has ensured that there have been no major grid failures in the country and its transmission losses are only 3-4%. The company is undertaking huge capital expenditure plans to almost double its capacities. As of March 2010, Rs 810 billion worth of transmission projects involving about 42,000 ckms of transmission lines, 58 new substations and transformation capacities of 88,675 MVA were at various stages of implementation. In 2010, co came with a FPO at price band of 85-90 Rs with discount of 5 % to retail investors. With this disinvestment Govt share holding reduced in the Co to 69 %.

Financials :

Co's revenue is growing at a rate of 20-25 % for last few years and it is expected that it will continue to grow at this rate for many years to come. Revenue of the Co increased from 3500 Cr in 2005-06 to 7500 Cr in 2009-10 and Net profit also were doubled in this period from 1078 to 2205 Cr. It is currently having an EPS of 5.7 on consolidated basis and it is expected that it will report an EPS of 6.8-7.0 Rs/share this fiscal and 7.8 to 8.0 in next fiscal. Co has increased its dividend payout from 1.2 Rs/share in 2007-08 to 1.75 Rs/share this fiscal.

Technical Analysis:

After Listing at a price of 85 against IPO price of 52 Rs/share, Co share price made its all time high of 167.5 in Nov 2007 yielding a P.E ratio of in excess of 50. Boom period did not last much long n within one year price nosedived to 51.75 Rs per share ( Equal to IPO price ). From 51.75 as a counter rally stock priced moved to 128 rs/share in May 2009. From that time , share price of Co is lackluster and is in very slow downtrend and hit low of 91 rs/share. 113-115 Rs band looks like the first resistance on upside. After this 121 Rs zone looks like another resistance. After 121, 128 , the recent high n then all time high of 167 Rs/share price are next resistances. It looks trend is changing from sideways to uptrend.

MACD on Weekly Chart is looking positive as it enters into positive territory from negative territory.

Investment Theme :

Power Grid is the largest power transmission Co in India. Co is more or less like a monopoly and there is hardly any investment from private sector in this field. Whatever the growth will come in power transmission have to be in this co. This co is in a unique position as the co have to grow to match capacity generation of private sector otherwise that power project will become idle. Besides, there is hardly commissioning risk with this co. This Co is likely to grow at a rate of 15-20 % for many years to come. Besides, Govt have reduced its stake in the co quite substantially so chances of big FPO diluting its stake is not much high. Besides, good liquidity in the Co ensures that price is more or less towards fair price. 675 shares have been bought at a price of 96.29 Rs/share and another 325 shares can be bought at same price on price decline. At a P/E of below 15 price is attractive and at a P/E of 30 + share price is overpriced. With this benchmark, profit booking also can be done in the Co at appropriate time. Co recently has executed Transmission network in Afghanistan which boosts of its technical capability. Co is manitaning Availability of Transmission network of more than 99 % and for 2010 , it clocked at 99.77 % which is excellent. Presently , Co is in expansion phase due to which there is an increase in depreciation and interest on continuous basis but due to growth in network Co is growing at a decent rate of 18-20 % pa. Later on, when there will not be a major demand for increasing the network , the interest and deperciation will start coming down and free cash flow will increase further. This Co can be excellent co for long term investment.