Tower POWER

Every summer, at the peak of power crisis, Delhi makes arrangements to source additional power from plants in neighbouring states.

Every summer, heat-ravaged Delhi falls short of its power needs. At the peak of the crisis, the chief minister announces arrangements to source additional power from plants in neighbouring states. As you bask in weather-tamed comfort, chew on this: that power is transmitted through a maze of towers, wires and sub-stations, and the company that enables most such inter-state and inter-regional transfers is Power Grid Corporation.

Growing demand
While state electricity boards (SEBs) control power transmission in the states, Power Grid, a public sector undertaking, does so between states. Technically, Power Grid isn’t a monopoly in inter-state and inter-region transfer of power. This segment of the power business was opened to private players in 1998, but their presence is insignificant.

Meanwhile, the need for inter-region transmission has been increasing — and will only increase further. That’s partly due to the rising demand for power and the nature of the power plants coming up. The present capacity of the National Grid, which is Power Grid’s domain, is 14,100 mw. The government is looking to increase this to 37,150 mw by 2011-12 (2.6 times current capacity) and 65,000 mw by 2006-17 (4.6 times current capacity). Besides this, Power Grid also draws from state projects. Together, in 2006-07, it transmitted 45 per cent of all power generated in India.

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In the 11th five-year plan (2007-12), the government has outlined an investment of Rs 1,40,000 crore in the transmission sector, of which, Rs 75,000 crore is for inter-state transmission. The nine ultra mega power projects (UMPP) the Centre is trying to fast-track to bridge the large – and increasing – gap between demand and supply in the country could provide a fillip to Power Grid’s numbers. The company has been asked by the ministry of power to prepare feasibility reports for construction of transmission systems for these UMPPs. The company itself plans to invest Rs 55,000 crore during this period. That’s almost twice the Rs 25,000 crore it has invested in completing 101 transmission projects since 1992.

Stable pricing
Even as new capacity drives growth for Power Grid, its existing feeder lines should keep the revenues and profit counters ticking. Power Grid works with power generating companies to set up transmission systems. It transmits that power to SEBs at tariffs that are pre-decided by the Central Electricity Regulatory Commission (CERC).

The tariffs are a cost-plus calculation, which ensures a profit for Power Grid, and are reviewed every five years (the next review is in 2009). The tariff incorporates the project cost, interest on loans, operating and maintenance cost, depreciation and foreign exchange variation, and a 14 per cent return on the equity component of the project (generally, 30 per cent).

This could change, though. The new national tariff policy, notified in January 2006, advocates a shift to competitive bidding, beginning 2011 or when the CERC thinks so. Competitive bidding will reduce the price protection that Power Grid has and the high margins that it earns, so will the expected entry of private players. Those are risks Power Grid faces, but these can be managed, as there’s going to be ample demand for its transmission services.

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Beyond power
Power Grid is the proverbial utility, with a captive business that assures a steady stream of sales and profits; with the new projects coming up, growth too. Increasingly, Power Grid is also looking at spin offs from its main transmission business, two in particular. The first is taking on transmission consultancy assignments. The second is leasing the fibre optic cable network it has set up alongside its transmission network, connecting over 60 cities. In 2006-07, the two businesses accounted for 8.4 per cent of Power Grid’s revenues. This could increase further. Till June 30, the company had orders for Rs 250 crore in the telecom business, up from Rs 77 crore for all of 2006-07.

In the last four years, Power Grid’s revenues have grown at a compounded annual growth rate (CAGR) of 12.7 per cent, net profit at 17.6 per cent. In spite of CERC cutting the return on equity in the tariff pricing from 16 per cent to 14 per cent from April 2004, the company has managed to improve margins. Operational expenses in running the towers are minimal. Setting them up is cost-heavy, because of which interest and depreciation become Power Grid’s main expenses.

The IPO is priced at Rs 44-52. based on its 2006-07 earnings and post-issue equity, that’s a PE of 13.7 and 16.2. That’s a fair price to buy this business for the long term. The power sector is finally seeing a lot of activity and Power Grid should be a major beneficiary. A change in rules has improved operating conditions for the good players, and SEBs can’t hold companies like Power Grid to ransom anymore. Indeed, there’s a lot of light.