Power Grid Corporation - Meaningful acceleration in capitalization to drive core earnings

Bunching up of private sector generation capacity addition driving accelerated execution: Given the expectations of accelerated pace of generation capacity additions with 120GW of projects under construction, we expect step-up in investments towards transmission. CERC has recently approved setting up of nine high speed transmission corridors (HSTCs). PGCIL is setting up these corridors, aimed at evacuating electricity from 38 private sector players putting up an aggregate generation capacity of ~42GW. Since most of this ~42GW capacity is likely to be commissioned over the next 3-4 years, and transmission infrastructure needs to come up in tandem, it would necessitate accelerated execution by PGCIL. Business visibility for PGCIL has improved meaningfully.

Capitalization of Rs200b over FY11-12 to drive near-term earnings: We expect PGCIL to achieve the capex of Rs550b targeted under the Eleventh Plan, despite meaningful delays in generation capacity additions, given the incremental capex towards HSTCs. During FY08-10, PGCIL's capex was Rs254b and the targeted spending in FY11-12 is Rs286b. Also, under the Twelfth Plan (FY13-17), targeted capex stands at Rs1t+, ~2x the Eleventh Plan capex. For PGCIL, order awards have been Rs150b-200b per year during FY09/FY10, and we expect the trend to accelerate. In comparison, the addition to gross block during this period has been an average of Rs33b per year, indicating a meaningful ramp-up going forward (we estimate Rs100b per year during FY11/FY12, ~3x the FY09/10 levels). CWIP as at March 2010 stands at Rs200b, ~47% of the gross block.

Telecom tower usage - not much upside: PGCIL is exploring possibilities of entering the telecom tower business. It has ~150,000 towers, but we understand that a large proportion of these are in forest areas, remote areas, etc without any meaningful catchment population. The revenue potential of this business could possibly be Rs4.5b-5b. Given that a large part could possibly be shared with distribution utilities, the residue value with PGCIL may not be meaningful.

Expect EPS CAGR of 15% till FY12; Buy: We expect PGCIL's regulated asset base (RAB) to increase from Rs94b as at March 2010 to Rs140b by FY12 (up 50%), with projects of ~Rs200b being commissioned and capitalized in this period. We expect the company to report a net profit of Rs26.6b in FY11 (up 15%) and Rs33.3b in FY12 (up 25%). Given the delays in terms of asset capitalization and post factoring in possible equity dilution, we marginally cut our EPS estimates by 4% for FY11 to Rs5.7 and by 6.8% for FY12 to Rs7.2. We maintain Buy with a target price of Rs123.

Source : Equity Bulls

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