Power Grid’s FPO gets bids over six times stock on offer

MUMBAI: The Indian primary market may be set for a revival with state-owned Power Grid Corporation’s follow-on public offer (FPO) generating demand for over six times the stock that’s being sold, although some analysts are of the view that this success was on account of attractive pricing rather than a trend reversal. This is the first FPO in the last two years.

The government is looking to raise about Rs7,600 crore by selling 84.71 crore shares through the FPO, which is part of the government’s plan to raise Rs40,000 crore in the current financial year through divesting stakes in various public sector units. Demand for the Power Grid offer that ended on Friday added up to about Rs47,500 crore, with strong appetite from both foreign and domestic institutional investors.

The stock gained 3% toRs98.90 on the BSE. The offer has received bids for 494.98 crore shares, as per data available on the BSE website.

The demand “is an encouraging sign of change of sentiment in the primary market,” said Vikas Khemnai, CEO of Edelweiss Securities. “Good market momentum, reasonable valuation, discount to retail investors and proper planning worked for this offer.”
The amount raised through initial public offers so far this year is about Rs1,601 crore though 35 issues, the lowest in a decade. The government is divesting 10% of its 86.36% stake and the company will raise an equal percentage of fresh equity through the offer priced at Rs85-90 per share. At the upper end of the price range, Power Grid’s FPO will raise Rs7,600 crore and at the lower end, Rs7,155 crore. Along with the fresh issue of shares, the government’s stake will drop to 58% at the end of the exercise. In the qualified institutional buyers’ category, the issue got subscribed 11.17 times, while the non-institutional and retail segment was subscribed by a factor of 1.85 and 1.17, respectively. Retail buyers and employees get a discount of 5% on the issue price.

Some market experts said the offer succeeded because it was reasonably priced and said the primary market will only welcome stock sales at attractive valuations. “There is always demand for quality issues at the right price. However, this cannot be taken as a trend of revival in the overall primary market,” said Jagannadham Thunuguntla, head of research, SMC Global Securities.

Most brokerages including Nomura, HDFC Securities, Anand Rathi had recommended that investors subscribe to the offer. While recommending a buy rating, HDFC Securities said the valuation was reasonable for a business model with guaranteed return on equity of 15.5%, strong growth visibility and minimal operational risks. It also said that the government stake declining was a positive, “as risk of further equity dilution is reduced,” the brokerage note said.

On the other hand, Japanese brokerage Nomura expects the stock to rally once the FPO is over.

Analysts at Anand Rathi are of the view that on the numbers front, the company has been generating good margins and positive cash flow from operations for the last five years.

Due to the nature of the sector, the company does have heavy leverage on its balance sheet due to the substantial capital expenditure requirement which will further boost earnings going forward.