Why propose a 15% FPO (follow-on equity offering)? – Power Grid does not require equity infusion and yet announced an FPO citing margin of safety, growing investment avenues as prime considerations
Power Grid Corporation of India (PWGR) still does not require equity issuance to execute its base-case business plans and yet has announced a follow-on public offering (FPO). The company management attributed the 15% FPO to growing investment opportunities and margin of safety that it needed. The management expects to conclude the FPO within CY13, subject to the government’s views on the quantum of issuance and its decision to simultaneously divest part of its holding in the company, says Nomura Financial Advisory and Securities (India) Pvt Ltd in a note.
In the past few weeks PWGR has won a bid-based project (taking the tally to three), has inked a MoU with the Railways for a nationwide transmission/ traction project, and has garnered visibility on a chunk of the ‘Green Transmission Corridor’ project coming its way (Figure below).
Potentially in FY14, there is a risk of assets capitalized having equity contribution below the 30% threshold. Hence, the company management stated that the margin of safety is low, which is not a preferred situation. Even though the lenders have not asked for equity infusion, the company has proposed an FPO of 15%.
According to Nomura, this would provide reasonable financial flexibility. “Should the equity raised be lower (vs. its base case), the company management stated it would still have enough financial comfort as the capex-capitalization gap narrows going ahead,” Nomura said.
Nomura said it expects that funds raised (through the FPO) would generate returns above its cost of equity (12%-13%). The impact of proposed equity offering in FY14 on Nomura’s forecast EPS/BVPS is given in the table below:
Nomura has given a ‘Buy’ recommendation with a target price of Rs142.
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