Power Grid Corporation of India Ltd. - Dilution surprise hides improving performance - 1QFY14 Results Review - Antique

PGCIL has capitalized INR29.5bn in 1QFY14 and maintained a 20% YoY growth in PAT. However, it has announced a 15% equity dilution through issue of 694m fresh equity shares stating an equity requirement for increased capex target for the 12th Plan from INR1000bn to INR1100bn. We believe management is expecting to further increase the 12th plan capex targets due to new tariff based projects expected to be won and upward cost revisions of existing projects due to high inflationary pressures in the last 3 years. We have incorporated the dilution at INR80/share (fetching INR55.6bn) and have revised our EPS downwards to 9.6/11 from 10.8/12.1 in FY14/15 respectively and have reduced our target price from INR142 earlier to INR124. We expect the stock to remain under pressure till clarity emerges about the timelines of the issue as we foresee a potential delay because the Co needs approval from the Govt. of India which is trying to push in a 5% disinvestment.

Valuation and outlook, reiterate BUY

We have lowered our target multiple to 1.7x from 1.9x earlier as FY15e RoE has been lowered from 16.5% to 14.8% due to the dilution. At CMP of INR91/share, the stock is trading at P/E of 8.3x and P/B of 1.2x on FY15E. We reiterate a BUY recommendation with a target of INR124/share (@ Target P/BV of 1.7x FY15e) as business model remains intact.

Source : Equity Bulls

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