Power Grid - Superior Execution to Drive Growth; Maintain "BUY" - Karvy

Power Grid Corporation of India (PGCIL) is significantly getting benefitted under the new management with better performance over last few quarters due to improvement in commissioning of projects. We continue to like PGCIL due to its regulated return business model and improved projects executions and earnings growth. The Company is also insulated from issues facing by the generation utilities like fuel availability, and weak financials of the SEBs.

Higher Capex to Boost Growth: PGCIL has currently operating 23,800MW transmissions capacity, and we expect that large capacity addition in generation in FY12-15E, which could improve projects execution in FY13-14E, when capitalization is seen at Rs. 132-165 bn vs. Rs. 28.8 bn and Rs. 75.5 bn in FY10 & FY11, respectively. We expect the regulated asset base to grow to Rs. 372 bn in FY17E due to generation capacity addition and system strengthening.

Expect 20% Earnings CAGR over FY12-15E: Management guidance for US$20 bn capex over the next five years looks reasonable, as transmission continues to be one of the biggest bottlenecks, and thus the regulatory scenario looks supportive. Based on our projects-wise analysis, we believe that PGCIL's transmission capex is on track, while most of the capex will go into assets creation and regulated equity over next few years.

Low-risk Business Model - Core RoE at 17.5-18% till FY17E: From FY10 onwards, PGCIL earns an assured post-tax RoE of 15.5% on equity invested in its capitalized transmission projects along with network availability-linked and early commissioning-linked incentives. We expect core RoE for PGCIL to remain at 17.5-18% till FY17E., and EPS CAGR growth of 19% during FY11-14E.

Strong Growth in Other Business Verticals: Based on Short-Term Open Access (STOA) capacity projections of 18GW by FY15E, we expect PGCIL's volume under STOA likely to rise to 100 bn units resulting in revenues to the tune of Rs. 4 bn in FY15E. We expect that PGCIL's consultancy biz will grow to Rs. 4.4 bn in FY15E from Rs. 2.9 bn in FY11.

Key Downside Risks:

- Lower than expected capitalisation,
- Further delay of generation projects.

Outlook & Valuation

At the CMP, the scrip trades at 1.8x FY13E and 1.6x FY14E P/BV, respectively and 13.8x P/E of FY13E and 11.3x FY14E, which we believe is at 28% & 36% discount to its historical average (FY07-11) P/B multiple. We use DCF methodology to value PGCIL, given the stable cash profile of its regulated business. We discount each cash-flow assuming a CoE of 15% to arrive at a fair value of Rs. 134 per share.

Source : Equity Bulls

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