Buy Power Grid Corporation - Motilal Oswal

Power Grid Corporation (PWGR IN; Mkt Cap USD10.8b, CMP Rs104, Buy)

- Adjusted net profit was Rs6b (up 16% YoY), marginally below our estimate of Rs6.3b. 2QFY11 earnings were driven by higher short term open access charges of Rs636m (up 103% YoY) due to high volumes and near 100% revision in STOA charges from 15 June 2009.

- In 1HFY11, Powergrid commissioned projects worth Rs51b (v/s Rs24b in 1HFY10), higher than the average of Rs33b a year in FY09. The management has guided for cumulative capitalization of Rs180b in FY11 and FY12, largely in line with our estimate of Rs200b.

- In 2QFY11 Powergrid received in-principal approval for the Kudankulam nuclear power unit where transmission capacity was declared commercial from April 2009, despite generation capacity not being operational. This addresses a key concern for Powergrid.

- Of the FY11 target capex, Powergrid spent Rs49b (38% of target) by 1HFY11. Besides, the project award for Powergrid will pick up as the board has approved part of the IPP projects with total cost of Rs581b and placed orders for Rs15b worth of projects in 1HFY11.

At a CMP of Rs105, the stock quotes at a PER of 18.6x FY11E EPS of Rs5.7 and 14.9x FY12E EPS of Rs7.1. A proposed IPO (expected in mid-November 2010) comprising a 10% fresh equity issue and 10% offer for sale will address funding requirements until FY14 and FY15. Maintain Buy with price target of Rs123.

Source : Equity Bulls

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