Monday, September 10, 2007

Power Grid Corporation IPO - APPLY

Power Grid Corporation (PGCIL) is India’s principal power transmission company. It has been designated a Mini-Ratna Category-I public sector undertaking since October 1998. This provides it with powers to undertake new projects without government of India (GoI) approval, subject to an investment ceiling set by the government. The company has received the highest annual performance rating from the Gol in each year since the year ending March 1994 (FY 1994).

PGCIL owns and operates most of India's interstate and inter-regional electric power transmission system. In that capacity, the company owned and operated 61,875 circuit kilometres (ckm) of electrical transmission lines and 106 electrical substations. In FY 2007, the company transmitted approximately 298 billion units of electricity, representing approximately 45% of all the power generated in India. Since its inception, it has completed 101 transmission projects and schemes.

The average system availability maintained by PGCIL was over 99% since FY 2002. The transmission losses were in the range of 3%-4%, representing mainly technical losses. As the power is transmitted over high voltage, it generally does not involve commercial losses. Nevertheless, transmission losses are factored in the tariff. As a result, it does not impact PGCIL

By creating a telecommunications network principally using its overhead transmission infrastructure, PGCIL has also diversified into the consultancy and telecommunications business, It owns and operates a fibre-optic cable network of over 19,000 kilometres. The company has been leasing out bandwidth on this network to more than 60 customers, including major telecom operators such as BSNL, VSNL, Tata Teleservices, Reliance Communications and Bharti Airtel. In July 2006, it also received a license to provide telecommunication services to end-users and is currently exploring options for providing these services.

The current initial public offering (IPO) by PGCIL is primarily to fund its transmission projects and to partly disinvest the government stake.


Strengths

  • Subject to government approvals, PGCIL has plans to invest Rs 55000 crore on transmission infrastructure during the eleventh five-year plan. With this investment PGCIL has plan to increase its inter regional capacity from 14600 MW to about 37000 MW in the eleventh five-year plan. This includes 45 projects that are currently being implemented by PGCIL, which would increase its transmission lines by 30536-ckm and transformer capacity by 29420 MVA.
  • With a debt-equity ratio of 70:30, the equity contribution is likely to be Rs 16500 crore. As PGCIL earns a regulated return on equity (ROE) of 14% (excluding north-eastern region), it will lead to additional profit of Rs 2310 crore. The company had earned ROE of 10.16% in FY 2007 as it had huge funds blocked in capital work-in-progress (WIP) and had incurred loss in the telecom business. PGCIL had a capital WIP of Rs 6083.89 crore end March 2007. However, it is earning ROE of 15% on its operational power projects.
  • In Q1 (June quarter) of FY 2008, PGCIL commissioned transmission assets worth Rs 2490.49 crore. Apart from this, four more projects (for which the company is raising fund and has spent Rs 704 crore till end July 2007) are to be commissioned in FY 2008. These projects are likely to drive PGCIL’s near term earning.
  • Working capital management has improved over a period of time. The average receivable collection period has declined from 76 days in FY 2005 to 47 days in FY 2007. The improvement in working capital management is also visible in the growth in net operating cash flows, which have increased to 1.6 times from Rs 2795.22 crore to Rs 4345.85 crore in this period. Presently, PGCIL has been able to collect nearly 100% of its receivables from state power utilities on time.
  • The transmission network of PGCIL increased from 50,745 ckm in FY 2005 to 59,461ckm in FY 2007 and to 61,875 ckm end Q1 of FY 2008. The ratio of ckm to employees has increased from 7.4 ckm in FY 2005 to 8 ckm in FY 2007 and to 8.3 ckm in Q1 of FY 2008. Revenue per employee has increased from Rs 37 lakh in FY 2005 to Rs 48 lakh in FY 2007.
  • Unlike power generation utilities, PGCIL was able to achieve its Tenth Five-Year Plan physical target with lower outlay.
  • The power transmission industry is capital and technology intensive. This acts as an entry barrier, giving a monopoly to existing players. Roughly it takes about Rs 1 crore of investment to set up 1 ckm of transmission line.
  • While starting the telecom business, PGCIL had targeted to make profit from FY 2009. However, the company has managed to post profit in Q1 of FY 2008. As against a loss of Rs 21.96 crore in FY 2006 and Rs 3.73 crore in FY 2007, it posted profit of Rs 9.09 crore in Q1 of FY 2008. For the full year, PGCIL expects to post handsome profit.


Weaknesses

  • PGCIL operates in a highly regulated industry. Its current tariff structure is likely to remain in place till FY 2009. Any change in the current tariff policy by the Central Electricity Regulatory Commission (CERC) could adversely impact the company. In the past, CERC has reduced the company’s ROE from 16% to 14% from FY 2005 and had capped the maximum incentive to 2% from 4% earlier. Thus, PGCIL’s net profit had declined from Rs 1023.16 crore in FY 2004 to Rs 829.78 crore in FY 2005. Subsequently with more projects coming on stream and increase in absolute contribution from other businesses, the company’s net profit recovered to Rs 1087.66 crore in FY 2007. At present, however, it appears unlikely that CERC will further reduce ROE as the earlier cut was in a scenario of declining interest rate.
  • Typically, PGICL undertakes projects to extend its transmission infrastructure. New electricity generators are connected to its transmission system. As PGCIL is paid ROE only after the commencement of service of a transmission project, delay in its transmission project or the related electricity generation project could block the company’s equity. PGCIL may, thus, go without any returns on that equity during the course of the delay.


Valuation

FY 2007 EPS on post-issue equity works out to Rs 2.6 and Q1 of FY 2008 annualised EPS Rs 4.3. However, translation gain of Rs 198.34 crore has led to decline in reported interest cost and has inflated Q1 of FY 2008 earning. So actual EPS for FY 2008 is likely to be lower than the annualised EPS of Rs 4.3

At the offer price band of Rs 44-Rs 52 and on the basis of FY 2007 earning, the P/E range works out to 17-20.1, respectively. There is no exactly comparable listed entity. PSU power generation major NTPC trades around P/E of 20 times FY 2007 EPS. Generation/transmission utility companies generally do not get such premium valuations. But the encouraging growth prospects in the power sector in India in the next five years have pushed up P/Es. Moreover, PGCIL is the only company through which investors will be able to get direct exposure to the power transmission sector. This will stand them in good stead.We believe with huge power shortages and its monopoly in the power transmission space, PGCIL would continue to report decent growth. We recommend ‘subscribe’.

reference:- www.capitalmarket.com

ANURAG DUJARI
Mobile - 09831909904, 09883059291, 09330911514, 09433988791
Messenger ID - anurag130
E-Mail - anurag130@yahoo.com

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Kaveri Seeds IPO - Avoid

Kaveri Seeds produces, processes and markets high quality hybrid seeds for crops like corn, sunflower, cotton, paddy, and grain sorghum. Located in Andhra Pradesh, the company is one of the few recognised agri-input companies in India. The company has production, processing and R & D facilities in Andhra Pradesh and Karnataka. Its R&D mainly focuses on developing superior hybrids in different crops like corn, cotton, sunflower, paddy, and bajra. All the seed varieties developed are marketed under the brand, Kaveri Seeds.

Kaveri Agriteck, a partnership, was acquired by Kaveri Seeds for Rs 50 lakh in September 2006. Kaveri Agriteck was a venture floated to manufacture micronutrients and bio-products.

Kaveri Seeds has four seed processing plants with 11 processing lines in Andhra Pradesh and Karnataka. The company has a combined processing capacity of 18,000 tonnes per annum. It also has a cob drying plant (to improve the germination, vigour and viability of the corn seed and, in turn, improve the yield of the crop) at two different locations in Andhra Pradesh.

The R&D facilities of Kaveri Seeds are at six different locations in Andhra Pradesh. The one in the Ranga Reddy district of Andhra Pradesh is recognised by the Department of Science & Technology, government of India. The R&D infrastructure includes 273 acres of farmland and state-of-the-art lab facility. About 187 acres of it are owned by the company. The rest are on lease. This protects its germplasm and related operations against any misuse and biopiracy. Fifty-five employees including 13 scientists are engaged in full-fledged research.

The extensive network of loyal and committed distributors and dealers in Karnataka, Tamilnadu, Maharashtra and Andhra Pradesh include 736 distributors and 3,500 dealers across southern India.

Kaveri Seeds intends to aggressively expand its operation to other states to have a pan-India presence. The company intends to finance its Rs 63-crore expansion plan from the proceeds of the public issue. The expansion includes acquiring farmland for R&D, setting up a marketing network in north India, establishing corn-cob drying and seed-processing plants apart from a biotechnology laboratory. The expansion is scheduled to begin in October 2007 and complete by May 2008 in a phased manner. Besides, it also wants to upgrade its existing facilities by November 2008.


Strengths

  1. Geographical expansion plans in north and east will result in volume-led growth.
  2. Moving up the value chain by introducing better quality products yielding high margin. Reduced dependence on outsourced production of foundation seed has resulted in substantial expansion of operating margin in the year ending March 2007 (FY 2007).


Weaknesses

  1. Mainly dependent on two crops – corn and sunflower – which contributed over 68% of the revenue in FY 2007. Similarly, has strong presence only in four states:. Andhra Pradesh, Karnataka, Tamil Nadu and Maharashtra.
  2. Operates in the agri-inputs industry, which faces risks related to weather, pests and diseases.
  3. The Indian seeds industry is highly competitive with a number of Indian as well as MNC players.
  4. Has witnessed continuous reduction in debtors’ turnover due to rising credit periods. The debtors’ turnover has come down from 5.1 times in FY 2003 to 3.67 in FY 2007.


Valuation

Kaveri Seeds has set a price band of Rs 150 to Rs 170 per equity share of Rs 10 each, translating into a PE of 19.5x on the lower price band and 22.1x on the higher side of the price band, according to EPS for FY 2007 on post-issue equity of Rs. 13.70 crore.

Monsanto India, the listed Indian subsidiary of Monsanto, US, which also sells hybrid seeds and genetically modified seeds to Indian farmers is presently trading at PE of 22x based on FY 2007 EPS.

Another hybrid seeds player J.K Agro Genetics is currently trading at PE multiple of 13x based on FY 2007 EPS.

The seeds industry is not a high-growth industry as its operations are sensitive to agro-climatic factors and unpredictable fluctuations. Moreover, Kaveri Seeds has shown substantial profit only in FY 2007 and its plans to enter the northern markets will take time to bear fruits.

In view of these factors, the asking P/E of around 20 looks high.

AVOID THE ISSUE

Reference:- www.capitalmarket.com

ANURAG DUJARI
Mobile - 09831909904, 09883059291, 09330911514, 09433988791
Messenger ID - anurag130
E-Mail - anurag130@yahoo.com

Disclaimer and Terms of Use: Stock market is subject to risk. High risk high gain is the key to stock market. We are not responsible for any loss or profit associated with stocks mentioned on this site/ by us. Under no circumstances will we be held liable for losses incurred due to information presented anywhere on the site or given through yahoo messenger or SMS. Please do your own research before establishing an equity/ derivatives position in a company. Not all stocks recommended by us are suitable for your investment needs. Carefully evaluate your own risk appetite. Subscription Prices subject to revise whenever required. Subscription Fees once paid cannot be refunded under any circumstances. Any error in this document cannot be claimed by anyone. Technical faults during online calls or SMS cannot be claimed by any of the clients and it’s beyond the limit of the service provider. Due to technical faults, the service might interrupt for short duration and no claim or refund will be entertained. Delay in SMS delivery is not within our limits and its totally mobile operator dependant. The articles on this site are not written by a registered investment advisor. The author may or may not be holding a position in companies that are being analyzed. More likely than not, the author will have an interest in the stock mentioned.The price offer and services are complimentary and subject to revise when and where required. No refund/ No Claims can be entertained once subscription is availed for that period
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