POWER GRID : On a constrained growth path:: Edelweiss

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􀂃 PAT up 25% on back of commissioning of projects worth ~INR 40 bn
Power Grid Corporation of India’s (PGCIL) Q2FY11 earnings grew 25% Y-o-Y on
back of commissioning projects worth ~INR 40 bn. Earnings were also driven by
higher short-term open access income (up 159%) at INR 639 mn. While the
consultancy division posted a PBT of INR 435 mn (up 60% Y-o-Y), telecom
business recorded PBT of INR 94 mn (INR 96 mn in Q2FY10).
􀂃 Capex target of INR 125 bn for FY11 and ~ INR 170 bn for FY12
Despite paucity of cash, PGCIL intends to incur a capex of INR 125 bn in FY11
and INR ~170 bn in FY12. As the 30% equity corpus for this capex is not
sufficient, the company is scheduled to tap equity markets in Q3FY11. The
company also targets commissioning projects worth INR 90-100 bn in FY11 and
~ INR 60–70 bn in FY12, of which, projects worth ~INR 51 bn have already been
commissioned in H1FY11. We have, hence, considered 10% equity dilution at
INR 100/share.
􀂃 XII plan capex target at ~ INR 1 tn +
The management guided for a XII plan capex of more than INR 1 tn as the
government has entrusted the responsibility of building the dedicated
transmission corridor for ~48 GW of private sector generation projects and 4-6
incremental UMPPs to PGCIL. The management is reasonably confident that the
entire capex spend would continue to earn the company regulated returns.
􀂃 Plan to enhance telecom and consultancy revenues
The management is expecting to build on the robust transmission business
expertise by garnering consultancy business both in India and abroad. Similarly,
the company plans to leverage its transmission assets by providing telecom
services. Earnings from these might not be more than 10-15% of the overall
earnings, but could enhance RoEs due to its zero capital intensity.
􀂄 Outlook and valuations: Limited earnings growth; maintain ‘HOLD’
Earnings growth could continue to be robust, but is contingent on equity dilution
and timely execution of associated generation projects in the XII plan. Moreover,
with peak RoE at ~17% and other businesses yet to scale up, we believe there is
limited upside from CMP of INR 104, as the stock is trading at 2.2x FY11E and
2x FY12E BV on a diluted basis. We maintain ‘HOLD’ recommendation on the
stock and rate it ‘Sector Performer’ on relative return basis.