Fpo Valuation Of Power Grid India Finance Essay

Power Grid Corporation of India entered the capital market on Nov. 9, 2010, with its FPO ( Further/Follow up Public offer ) of 841.8 million equity portions of Rs 10 each, ab initio priced in the monetary value set of Rs 85 to Rs. 90 a portion for general public and reserve of 3,389,600 equity portions for subscription by eligible employees. A 5 % price reduction was offered to retail investors and employees, on the monetary value discovered.

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FPO comprises of a fresh issue of 420.9 million portions and offer for sale of 420.9 million portions. Book running lead director to the issue are SBI Capital Markets, Goldman Sachs Securities, ICICI Securities and J.P. Morgan India.

Literature Review

There is batch of work done for rating of company, many cardinal ratios and different techniques are employed to right foretell right value per portion. Initial public offering are great options for investors as it is found by survey that IPOs are by and large underpriced and in two three old ages the monetary values shoot up. But the same is non true for FPO, it is seen that that FPOs made during a bull tally tend to be priced sharply, sometimes even overpriced. The issue monetary value in FPOs is by and large a alluring price reduction to the latest monetary value of the stock in the secondary market. The cogency of utilizing P/E multiples is questioned many times in the rating.

As concluded by Henk Berkman et. Al. that traditional DCF and P/E multiples explain three quarters of the cross-sectional fluctuation in market monetary values, larger mistakes arise due to utilizing of industry informations in computation. Moonchul Kim and Jay R. Ritter besides concluded that utilizing ratios of comparable houses is of merely limited usage if historical Numberss instead than prognosiss are used. Within an industry these fluctuations tend to turn, therefore ensuing in modest prognostic values. Lowry and Schwert concluded that monetary value set given by companies does non integrate all available information. Investment bankers so change offer monetary values on footing of recent market returns. They besides found out that response of concluding offer monetary value to available information in asymmetric with negative information being more to the full incorporated than positive information.

State Analysis

Economy Analysis

India is the universe ‘s largest democracy with an estimated population of 1.157 billion ; it has a GDP of US $ 3.57 trillion on a buying power para footing as estimated in 2009 harmonizing to the CIA Factbook. This puts the Indian economic system as the fifth largest in the universe after the European Union, United States, China and Japan.

Harmonizing to the CIA Factbook, India ‘s economic system at 6.7 % was the 2nd fastest turning major economic system in the universe after China in FY2009. Furthermore harmonizing to the RBI ‘s Macroeconomic and Monetary Developments First Quarter Review 2010-11 dated July 26, 2010, the Indian economic system exhibited robust acceleration in the gait of recovery in the 4th one-fourth of FY2010 led by strong growing in industrial activities. At 8.6 % , GDP growing in the 4th one-fourth of FY2010 showed a important recovery in relation to the 5.8 % growing recorded during the 2nd half of FY2009. The RBI expects overall GDP growing to speed up further in FY2011.

The Indian economic system has weathered the planetary downswing comparatively good. The OECD, in its Economic Outlook released in May 2010, undertakings that India ‘s existent GDP will turn at a rate of 8.3 % in FY2010 and 8.5 % in FY2011.

Although the Indian economic system has improved markedly since the execution of economic reforms in 1991, India continues to underachieve in the development of its substructure. Harmonizing to the GoI ‘s Projections of Investment in Infrastructure during the Eleventh Five Year Plan released in October 2007 deficiency of substructure is one of the major restraints on India ‘s ability to accomplish 9.0 % to 10.0 % growing in GDP.

To surge over the substructure lack power sector has been recognized by the GoI as a cardinal substructure sector to prolong the growing of the Indian economic system. As per the Projections of Investment in Infrastructure during the Eleventh Plan released in August, 2008, investing in the electricity sector is projected at Rs. 6,665 billion ( about US $ 166.63 billion ) at FY2007 monetary values, or about 32.42 % of the sum projected investing in substructure during the Eleventh Plan.

Sector Analysis

India ranked as the universe ‘s 5th largest energy bring forthing state in 2009 behind the United States, China, Russia and Japan with estimated entire production of 723.8bn kWh. It is besides the universe ‘s 5th largest energy devouring state, with estimated entire ingestion of 568bn kWh in 2007.

A Demand for electric power transmittal services is mostly dependent on degrees of demand for electric power and on the ability of the electric power coevals and distribution sectors to service that demand. The Govt. of India has developed a national electricity policy, which aims at speed uping the development of the power sector through the coevals of extra power, in order to supply for constitution of substructure to increase the sum of power generated. This policy is being promoted by the Ministry of Power as “ Mission 2012: Power for All ” .

Demand for Electricity in India

Per capita ingestion of power in India remains comparatively low compared to other major economic systems, as below:

Above graph shows the monolithic potency for demand of power in India hence the growing potency for power companies and industries associated with the power sector in India remains bright.

Government of India has planned monolithic investing for power sector in 11th five twelvemonth program. To increase installed power coevals capacity by 78,700 MW by 2012 as envisaged by the eleventh five twelvemonth program, it must besides ease an enlargement of the transmittal web and inter-regional capacity to convey power. Average investing in T & A ; D in India during the Tenth Plan was approximately 32 % of investing in coevals.

Company Analysis

Power Grid was conferred mini Calamus rotang position by govt. in India 1998 which was upgraded to navratan position by GoI in 2008.

PGCIL ‘s nucleus concern is the transmittal of electric power. It owns and operates a big web of transmittal lines and substructure that constitutes most of India ‘s Interstate and Inter- regional electric power transmittal system ( ISTS ) and carries electric power across India. As the proprietor and operator of most of the ISTS, it expands the system increasingly, connects new clients to the system and operates and maintains the system. It is besides engaged through joint ventures with regard to certain transmittal undertakings.

PGCIL has diversified into confer withing and telecom substructure concern every bit good apart from T & A ; D. It has created over 20,000 kilometers of telecom lines linking 129 metropoliss.

Company has started in consultancy concern in 1995, boulder clay day of the month in the transmittal and distribution web, including in grid direction and capacity edifice and in the telecom services to over 115 clients in over 330 domestic and international undertakings.

Some outstanding points of the company

Assetss of the company ( beginning: one-year studies of company )

Employee turnover of the company ( beginning: one-year studies of company )

Shareholding Pattern

Beginning: Annual studies

Beginning: Annual studies

After the completion of the issue govt shareholding which was bulk stockholders with 86.36 % equity will come down to 69.40 % .

Performance compared to the equals

As clear from the graph Power Grid stock outperformed its equal in old twelvemonth, moreover its PE ratio compares favourably with the industry PE. OWERGRID added about 19,170 Ckt. Kms of Extra High Voltage transmittal lines, 36 no. of EHV sub-stations and Power transmutation capacity of about 25,130 MVA during X Plan, thereby heightening its overall transmittal web to 59,461 Ckt.

Methods Employed

We employed three methods for the rating of FPO by Power-Grid

Discounted Cash Flow ( DCF ) method: In this method we project future hard currency flow to equity ( FCFE ) and so dismiss it with the cost of equity of the house. This method does non give true value of a company if FCFE in future tend to veto. Then DCF gives value less than the present book value of the house.

Residual Earning ( RE ) method: This method is based on the rule that one will at least pay the book value of company. So Value = Book Value + premium. The premium is calculated utilizing the residuary earning which is given as:

The residuary net incomes therefore calculated are discounted by the cost of equity of the house.

Abnormal Earning Growth ( AEG ) method: In this method we capitalise the current earning and so happen out the unnatural income over the expected income in following periods. The equations for ciphering AEG are gives as:

, where

, and

AEG calculated is so discounted at cost of equity.

Calculation of Cost of Equity

Cost of equity was calculated utilizing five old ages information of Power Grid and Nifty.

, where

We have calculated the value per portion by first non including the equity got from the fresh issue, and 2nd clip including the equity gained. There was non much difference in the portion monetary values that came.

Premises

The Government of India has adopted a system of consecutive Five Year Plans that set out marks for economic development in a figure of sectors, including the power sector. Each consecutive Five Year Plan has had increased marks for the add-on of power coevals capacity. In the twelfth five twelvemonth program there will be high investing in transmittal and distribution. In the undermentioned two old ages it is assumed that growing rate will stay as in the old ages of current five twelvemonth program. Sing these penetrations we have made these growing rate premises:

Year

2011

2012

2013

2014

2015

2016

2017

2018

2019

Growth rate

20 %

20 %

23 %

23 %

23 %

23 %

20 %

17 %

8 %

Assetss were projected harmonizing to old old ages ‘ tendencies go oning at 20 % growing rate for all old ages. Depreciation is calculated as 3 % of the assets. The 3 % was achieved by averaging the past old ages ‘ depreciation to plus ratios. Dividends are assumed to be changeless at 31 % of net income after revenue enhancement ( PAT ) .

Interest was taken by spliting EBIT by the involvement coverage ratio. The involvement coverage ratio is assumed to stay changeless following old old ages ‘ tendencies.

2010

2009

2008

2007

2006

Average

Interest Coverage

2.701822

2.357006

2.291874

2.299521

2.233828

2.37681

Tax rate was assumed to be 33 % as predicted on the footing of recent quarters ‘ consequences.

Consequences

Using simple DCF we calculated FCFE and discounted future values to present twelvemonth. The value per portion came about: 87.27

Residual income method predicted the value of one portion = 90.61

Using Abnormal Earning Growth model the value came = 117.52

Using the equity value from the fresh issue presuming a monetary value and so utilizing convergent thinker to compare the false monetary value and the value and got from methods the rating comes around

DCF computation consequence in 89.49 Rs per portion

Residual Earning consequence in 83.11 Rs. per portion, and

Abnormal Earning Growth consequences in 120.52 Rs. per portion.

Decision

The follow-on public offer ( FPO ) of India ‘s biggest inter-state transmittal company Power Grid Corp had been subscribedA 3.61 times on 3rd twenty-four hours of book edifice procedure as per NSE web site. The high subscription increased in ulterior yearss making to degrees of 8 to 9 times of oversubscription. There was a autumn in the monetary values because of the broad price reduction between the current market monetary value and the FPO monetary value. The authorities had fixed the monetary value set for the offering between 85 and 90 a portion, a price reduction of 12-17 % to November 5 shutting monetary value of 102.

As can be seen in the graph after the FPO issue the stock monetary values of Power Grid went down drastically. It had recovered in get downing of December but has once more gone down. PGCIL has planned to utilize fresh equity returns of around Rs 3,800 crore to fund the equity part for 13 transmittal undertakings. Transmission is a strong watercourse of the power sector and will profit the most in the coming old ages. With the demand for power expected to turn at 9-10 % in the following decennary. As the issue day of the month of FPO came nigher and passed the monetary values began to diminish. The autumn in monetary values can be seen as the rectification done by the market in ulterior yearss to the original potency of the company.

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