Visit http://indiaer.blogspot.com/ for complete details POWERGRID: 2QFY11 adjusted profit marginally below est, fixed asset capitalization improves meaningfully, Buy
- During 2QFY11, Powergrid (PWGR IN, Mkt Cap US$10.8b, CMP Rs105, Buy) reported revenues of Rs21b (up 22% YoY), EBIDTA of Rs18b (up 21% YoY) and reported net profit of Rs6.5b (up 42% YoY). Reported numbers includes several extraordinaries and arrears; adjusted profit stands at Rs6.0b (up 16.1% YoY), marginally lower than estimates of Rs6.3b.
- Short Term Open Access (STOA) charges increased to Rs636m (up 103% YoY, and up 42% QoQ) given increased quantum of power trading. As per CERC, short term volumes now contribute 13% of the power generation in the country, vs 9% in FY10. In 1HFY11, STOA charges stand at Rs1.1b, as compared to Rs1.2b in FY10 given near doubling of charges wef 15th June 2009 and higher volumes.
- During 1HFY11, fixed asset capitalization stood at Rs51b, up from Rs24b YoY and Rs36b in FY10 as Rs39b of projects were commissioned in 2QFY11. This is much higher than historical averages of Rs33b pa during FY09-10; and would drive near term earnings growth for Powergrid. The management has guided for cumulative capitalization of Rs180b during FY11 and FY12, and is largely in line with our estimate of Rs200b. CWIP as at Sept 2010 stands at Rs208b, ~44% of the Gross block.
- As per CERC regulations, transmission assets can be declared commercial even in the case of delays in generation capacity, if the transmission project has been completed. In 2QFY11, Powergrid has received in-principal approval for Kudankulam nuclear power where the transmission capacity is declared commercial wef April 09, despite generation capacity still not operational. This precedent will now enable Powergrid to approach the regulator for several such instances, and thus the impact of transmission returns getting impacted given delays in generation projects will now be minimized. We believe that this addresses one of the key concerns for the company.
- Powergrid has planned capital expenditure of Rs129b in FY11 (vs Rs105b in FY10), up 23% YoY and Rs169b in FY12 (up 31% YoY). In 1HFY11, capex spent stands at Rs49b (38% of the FY11 target). The management stated that cumulatively Rs15b of projects have been ordered till date of the Rs581b transmission projects for private IPPs and a large part of the ordering will be completed in FY12/FY13.
- At CMP of Rs105, the stock quotes at PER of 18.7x FY11 EPS of Rs5.6/sh and 15.0x FY12 EPS of Rs7/sh. Proposed IPO [expected in mid Nov 2010] comprising of 10% fresh equity issue and 10% offer for sale will address the funding requirements till FY14/15. Maintain Buy with price target of Rs123/sh (upside of 17%).
2QFY11 adjusted PAT marginally below estimates; STOA charges in 1HFY11 already at FY10 levels
- During 2QFY11, Powergrid reported revenues of Rs21b (up 22% YoY), EBIDTA of Rs18b (up 21% YoY) and reported net profit of Rs6.5b (up 42% YoY). Reported numbers includes several extraordinaries and arrears; adjusted profit stands at Rs6.0b (up 16.1% YoY), marginally lower than estimates of Rs6.3b.
- Reported numbers include: Wage arrears (Rs124m), Foreign Exchange Rate Variation (Rs130m) and Arrears (Rs756m).
- Short Term Open Access (STOA) charges increased to Rs636m (up 103% YoY, and up 42% QoQ) given increased quantum of power trading. As per CERC, short term volumes now contribute 13% of the power generation in the country, vs 9% in FY10. In 1HFY11, STOA charges stand at Rs1.1b, as compared to Rs1.2b in FY10 given near doubling of charges wef 15th June 2009 and higher volumes.
Transmission business PBT up given prior period arrears and higher MAT, Consultancy business PBT up 203% YoY
- During 2QFY11, transmission revenues stood at Rs20b (up 19% YoY), Consultancy income at Rs794m (up 56% YoY), Income from load dispatch centre management at Rs1b (up 83% YoY) and Telecom business at Rs463m (up 9% YoY).
- For Transmission business, PBT stood at Rs8.5b (up 63% YoY) driven by recoveries of MAT (FY11 at 19.93%, vs 16.995% for FY10), capitalization of Rs51b, higher short term open access charges, etc.
- Consultancy division PBT stood at Rs436m (up 203% YoY), while PBT for dispatch centre division stood at Rs295m (up 800% YoY). Telecom division reported profit of Rs94m, flat YoY.
Valuations and view
- We expect PGCIL’s RAB to increase from ~Rs94b as at March 2010 to Rs211b by FY13E (increase of 2.2x), as projects of ~Rs360b are commissioned and capitalized in this period. This will lead to corresponding increase in regulatory returns.
- We estimate PGCIL to report net profit of Rs26.1b in FY11E and Rs34.4b in FY12E. We have valued PGCIL based on average of DCF and SOTP valuation to arrive at a target price of Rs123/sh. Stock trades at a PER of 19x FY11E and 15x FY12E and P/BV of 2.2x FY11E and 2.0x FY12E. Maintain Buy.
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