)
Warren Buffett likes to invest in companies that manage toll bridges and similar companies that deal with infrastructure. He feels that these are the best investment bets against inflation and give good growth provided you buy it at the right price.
Power transmission operates like a toll bridge company. Every time power generated by a power plant needs to be evacuated, it needs to travel through some part of 102,109 circuit kilometres of interstate cable that PowerGrid Corporation has laid out. For using this network PowerGrid collects its 'toll'. The beauty about Power Grid is that it own 90% of all such cables in the country. The company has a monopoly over power supply in the country.
As far as the business model is concerned, it fits in with Warren Buffett's philosophy, but there is the other question of price. Is this price band of Rs 85-90/share compelling enough for one to invest?
Before answering that question, lets look at the previous ocassions PowerGrid tapped the market. The company approached the primary markets in September 2007, offering shares at a price of Rs 52 per share. The issue was oversubscribed 64.5 times. The issue was sold at a PE of 12 times FY08 projected annualised earnings of Rs 4.3. However, the company closed the year with an EPS of Rs 3.5.Effectively the issue was sold at a discounting of 14.9 times.
In November 2010, the company again approached the market with a follow-on offer which was bundled with a divestment offer for sale by the government at a price band of Rs 85-90 at a valuation of 19.6 times.
In the present issue, though the offer price is Rs 85-90, shares are being offered at a valuation of 10.3 times. The shares are being offered at the lowest valuations ever in the history of the company. PowerGrid in the secondary market too is trading near its lowest valuations since the time it was listed.
Even as the shares are offered at its lowest valuation, the company continues on its growth path. In the 12th five year plan, the company will be spending twice as much in capital expenditure as it did in the 11th plan. Analysts are expecting the company to post a 20% growth over the next 4-5 years.
PowerGrid's issue though is offered at the same price as it did in 2010, its valuation is almost half. Further, on a dividend yield basis the stock is giving a 3% yield. Little wonder that investors are rushing to apply for the issue which has already been fully subscribed.
However, if the company has such strong fundamentals and a robust business model, what was the need for selling the issue so cheap and diluting the company's equity base. The only answer is government's desperation to meet its divestment target. Though the government sold its stake at twice the present valuation in 2010, it is not confident of meeting the target this time around.
So even though the company might not be happy with the cheap valuations, investors surely are not complaining.
