Thursday, March 13, 2008

Power Grid Corporation - Overvalued !!

Just finished reading an updated research report by a broking firm, which recently got listed on the bourses and the one which is sponsoring the shorter version of Cricket, on Power Grid Corporation. The firm has an "Accumulate" rating on the stock.

However, what strikes me is the price at which the rating has been put out - Rs.110 (on 7-Feb-08). This is the same price at which the firm had put a 'Reduce' rating on the stock, exactly seven days before, i.e. as on 31-Jan-08. Strange are the ways in which Stocks are being rated on Dalal Street.

As for my view, I think the stock is quite overvalued at current levels. Despite having an envious business model and a near monopolistic position in the power transmission business, I think the price just isn't right. At the current price (Rs.104 per share), the Power Grid Corpn stock is quoting at a P/E of around 28 times.

That for a stock which is unlikely to be able to expand its earnings (at the net level) by more than 20-25% over the next few years, that too providing its telecom towers biz does well. Further, and more importantly, Power Grid Corpn earns a fixed return on equity (as stipulated by the Government) of 14%, with upside, if any.

I would be comfortable buying it at around Rs.70-75, given its growth prospects and the near monopolistic status. At the current price, there's significant room for disappointment on the downside.

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