Power Grid Corporation - Upsides limited; downgrade to HOLD - Religare

We recently interacted with the PWGR management. Meeting takeaways: (a) Risks to the 12th plan capex target of Rs 1tn fairly low. (b) A likely increase in the D/E ratio to 75/25 (from 70/30 now) to fund capex without dilution in the near future. (c) A potential delay in collections as a few eastern SEBs contest new (POC-based) tariffs. The stock currently trades at a FY13/FY14 P/B of 2.1/1.9x, with ROEs at 15.3/16.7%. With average book growth of 12% over FY12?FY15, the stock appears fairly valued at current levels. Downgrade to HOLD.

Key meeting takeaways:

- Capex guidance of Rs 1tn maintained for the 12th plan. Risks to capex may stem from delays in generation-linked transmission projects (20?25% of the above capex). Management, however, is looking at various other initiatives to maintain capex, such as JVs with SEBs for transmission links/ participation in Independent Power Transmission (IPT) lines. Our capex estimate for the 12th plan stands at Rs 850bn - lower than the management guidance.

- May reduce D/E to fund capex: Management indicated a likely increase in the D/E ratio to 75:25 from 70:30 currently, to fund capex plans by FY14E/15E. In our view, the proposed change in capital structure is likely to lead to lower marginal profits from subsequent projects, which in turn is likely to impact long-term profit growth.

- Focus on working capital improvement: Over the long term, PWGR aims to improve its working capital position that has been stretched (on a relative basis) in the last 18 months on account of extended payment days from SEBs.

- Downgrade to HOLD: At our current estimates, PWGR trades at a P/B of 2.1x/1.9x for FY13E/FY14E. ROEs are likely to average at 15.3-16.5% over FY13?FY15E. The stock appears fairly priced given the long-term risk to ROEs. Downgrade to HOLD.

Source : Equity Bulls

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