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The Power Grid Corporation of India Ltd (PGCIL) follow-on public offering, which opens on Tuesday for institutional investors, gets a thumbs-up from most analysts, as they recommend investors to subscribe to the issue.
Rs 85-90 price band
The FPO comprises 78.70 crore equity shares, of which, fresh issue will be 60.18 crore and the balance 18.51 crore could come from the Government. PGCIL has fixed a price band of Rs 85-90 a share. The issue closes on December 5 for institutional investors and on December 6 for retail investors and employees.
At the upper end of the price band, the offer will fetch Rs 7,083 crore.
JP Morgan remains overweight on PowerGrid with a price target of Rs 110. “Unless we see a shift in gears on ambition (capex plans), PGCIL can manage a few years without another FPO. We are incorporating PGCIL’s strong execution track record in our forecasts.
“Barring a stock price decline post announcement of the current FPO to factor in impending earnings dilution, PGCIL has underperformed the Sensex by 17 per cent over the last four years, despite a near doubling of earnings,” JP Morgan said.
Main drivers
Jefferies believes over the next 12 months, CERC-regulated equity change, debtor days and capacity expansion will drive the stock performance. The foreign brokerage firm, however, revised the price target to Rs 130 from its earlier expectation of Rs 135.
Religare said: “With the overhang of the FPO behind us, the risk to valuations is mitigated. In our view, the current valuation has upside potential owning to the stable business model.”
Another domestic brokerage firm Karvy said: “We expect the capex to be capitalised at a faster rate resulting in higher earnings due to increased commissioning of projects. We expect net sales to see 21 per cent CAGR in FY13-15E on the back of higher capitalisation, while PAT to rise by 14.5 per cent.”
As PGCIL is currently trading at a historically low valuation, we advise investor to subscribe to the FPO with a SOTP-based (sum-of-the-parts valuation) target price of Rs 128 a share, said Karvy.
“Valuation is very reasonable for a business model with guaranteed return on equity (15.5 per cent), strong growth visibility and minimal operational risks,” brokerage HDFC Securities said in a note. “With the equity dilution overhang removed, the stock price will be driven by fundamentals, which remain strong.”
On Monday, PowerGrid shares closed 1.74 per cent lower at Rs 93.40, on the BSE.
shanker.s@thehindu.co.in
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