Power Grid Corporation of India - Grid Of Growth And Permanence - Nirmal Bang

Augmenting capex followed by higher capitalisation (superior project execution run rate) of power transmission assets would boost core earnings of Power Grid Corporation of India (PGCIL). We believe PGCIL remains the safest bet among power transmission companies due to its annuity-based business model (15.5% post-tax regulated RoE) despite the sector's structural issues. Core demand, higher inter-regional capacity to limit regional deficits and reforms in the distribution space (state electricity boards' losses, open access) are expected to increase the need for transmission corridors. We believe PGCIL is attractively positioned at the beginning of 12th Five Year Plan (FY13-17), considering the huge capex outlay planned, driving up its regulated equity. We assign a Buy rating to PGCIL with a SOTP-based target price of Rs132, up 18% from the CMP.

Higher capex to ensure growth: With an increased emphasis on integrating India's T&D network, PGCIL has planned capex outlay of Rs1trn under the 12th Five Year Plan (FY13-17), 82% higher compared to Rs550bn capex incurred under the 11th Plan (FY08-12). Considering its strong track record of project execution and the fact that 76% of planned capex of Rs1trn has already received investment approval, we forecast total capex outlay of Rs924bn until FY17E. This would lead to robust growth for PGCIL, as its earnings are linked to capex and the rate of capitalisation of transmission assets.

Rising capitalisation to enhance RoE: We expect capex under the 12th Plan to be front-ended (higher quantum in the initial years) based on planned transmission capacity addition over FY13-15E. Consequently, we expect capitalisation of transmission assets worth Rs170bn/Rs172bn in FY13E/FY14E, respectively, resulting in a 23.2% CAGR in regulated equity over FY12-15E compared to 17.6% CAGR achieved over FY08-11. Higher capitalisation leads to higher regulated equity (eligible for earning regulated returns) driving up the reported RoE from 13.9% in FY12 to 14.5%/15.7% in FY13E/FY14E, respectively.

Augmentation of inter-regional capacity to reduce deficits: The intent to create a national grid to enhance connectivity among the regions will result in inter-regional capacity growing by 37GW in the 12th Plan period, as per the Central Electricity Authority (CEA). It will help in capping the deficits among the regions via inter-regional energy exchange (21% CAGR in FY09-12) further aiding PGCIL's transmission growth.

Valuation: We assign a Buy rating to PGCIL with a target price of Rs132, providing 18% upside from the CMP. We have valued the stock on SOTP basis, assuming cost of equity of 12%, RoE of 17% and growth of 7% in regulated equity. The target price comprises core transmission valuation of Rs127/share (based on 2.1x P/BV multiple on FY14E book value) and cash and investments valued at Rs5/share.

Source : Equity Bulls

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