Power Grid is a central transmission utility engaged in inter-state and interregional power transmission business.
Over a period of 16 years, it has emerged as one of the largest and best managed transmission utilities in the world.
Currently, it is operating around 67,000 ckt. kms of transmission lines along with 111 sub-stations and transmits about 40%-45% of the power generated in India. The company has around 45 projects in hand, which would drive revenues and earnings in the medium-term.
The Company has monopoly in this business over the past 16 years. However, with the introduction of the competitive bidding mode in 2011, private players are expected to enter the market.
Power Grid’s asset base of over Rs350 billion and vast expertise in this field would pose a formidable challenge to its competitors. Diversification into consultancy and telecom has started generating additional income, which is expected to grow significantly in the coming years.
The Government of India’s significant expansion plan to meet the power needs of the country completely is likely to open new vistas for Power Grid, which should keep the revenues and earnings steady in the long run.
We estimate net sales and net profit to grow at a CAGR of 20.5% and 19.5%, respectively by 2010 on the back of significant investment opportunities available for the company.
At the current market price, the stock is trading at a price-to-book (P/B) multiple of 2.7x. Based on our valuation, the target P/B multiple of the stock is 3.29x giving us a fair value price of Rs110, implying a potential upside of 21% from the current market price of Rs91. We initiate coverage with a BUY rating.