On her majesty's service

SMARTSHARE

Though there have been numerous public offers from the President of India, Power Grid Corporation of India (PGCIL) has the distinction of being the first offer when the Rashtrapati Bhavan is being occupied by a lady.

This statistic apart, the PGCIL is a much-awaited issue that is likely to receive a standing ovation from investors. PGCIL is entering the capital markets with an offer for sale-cum-public offer with a price band of Rs 44 to Rs 52. The size of the offering could vary from Rs 2,525 crore to Rs 2,984 crore. The issue opens on September 10.

PGCIL has a monopoly in the interstate power transmission business and owns and operates most of India's interstate and inter-regional electric power transmission system. As of June 2007, the company owned and operated 61,875 cKm of the electrical transmission lines, and 106 substations spread across the country.

Power produced needs to be carried to the place of consumption. Some power utilities lay down the transmission lines to distribute the power from the point of production to consuming points.

However, since power may be produced at one place and consumers may be far away, laying a transmission line may not be a viable option for a standalone company. PGCIL steps in here to provide the service.

Power companies have the option of setting up plants close to their customers. But they will then need to transport coal from pit-heads to the plants. Pilferage, high dust content and transportation cost would make the affair quite costly. Compared to transporting coal, transmission of power happens at a fraction of the cost.

Most of the thermal power plants are going to come up in the eastern states of Orissa, Jharkhand and Chhatisgarh. Hydel plants will come up in the north-east and the north. This power will be then carried to the power-deficient western and southern India. PGCIL would thrive in this scenario.

Though the government allows it to have 14 per cent return on its equity in the projects that PGCIL puts up for transmission, it actually earns only 11 per cent.

That makes it very competitive in the business. Although the government has allowed the private sector to build a power grid, new projects in the sector are coming through JVs with PGCIL.

The uptime of PGCIL grids is more than 99 per cent, which allows it to earn higher returns. This puts PGCIL ahead of the pack, in terms of both cost and efficiency.

The company is leveraging this expertise to its advantage. Around 6 per cent of the revenues in FY07 came from consulting. Besides, it owns and operates 19,000 km of fiber-optic cable network covering all main territories of India and have been leasing bandwidth to more than 60 costumers.

The sector contributes around 2 per cent to the total revenues. The company has been granted Infrastructure Provider-I and Internet service provider category-A licences, which enables the company to get debt at cheaper rates.

In India, the ratio of demand growth in power to GDP growth is around 1.5. Therefore, in order to support the GDP growth of around 8 per cent per annum (which is the goal of "Power for all by 2012" mission), the rate of growth for power supply needs to be over 12 per cent annually.

At the upper band, the stock would have a market capitalisation of Rs 21,886 crore, which would give it a rank of 38 in the BSE hall of fame. Though it has not yet been notified, the stock should make it to the derivative list from day one.

At the higher end of the band, the stock is priced at a PE of 15 on estimated 2008 earnings. Considering that you are being offered a near monopoly business, the pricing is attractive and leaves enough on the table for the investors. Those with investible surplus can consider applying at cut off.

Investors who are scared by the current volatility and do not know what to do may, in fact, book partial profits elsewhere and deploy the proceeds in the IPO. There is an obvious risk even in IPOs, but the dice seems to be loaded in favour of the investor in this case.