Power Grid: Operational capacity addition surprises; maintain accumulate: Alchemy

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Operational capacity addition surprises;
maintain accumulate
Powergrid’s 2QFY11 results were above expectations due to a higher
contribution from non-transmission segments. Adjusted PAT increased by 19%
YoY to Rs5.9bn. 2QFY11 witnessed significant addition to operational capacity.
We revise our TP upwards to Rs126/share. Maintain Accumulate.
Non–transmission segments boost recurring earnings growth
Powergrid’s reported PAT increased 42% YoY to Rs6.5bn. Adjusting for (a) prior period
income of Rs405mn (b) ~Rs330mn profit from the Kudankulam transmission system
from April 2009 to June 2010 (for which the tariff was allowed to be claimed), recurring
PAT increased by 19% YoY to Rs5.9bn. This was above our estimate of Rs5.6bn.
One of the key reasons for higher-than-expected profits was higher revenues from
consultancy and short-term open access (STOA). Consultancy segment revenue at
Rs789mn (+57% YoY) and STOA revenues at Rs639mn (+159% YoY) were Rs410mn
above our expectation.
Key developments
 Rs39.3bn worth of assets were commissioned during 2QFY11 led by the
commissioning of the Barh-Bhiwadi segment (Rs26.5bn) of the transmission
system related to the Barh project.
 CERC has allowed the tariff to be claimed for the Kudankulam transmission
system. Though this line has been ready since April 2009, the tariff could not be
claimed as the line could not be “commissioned” due to a delay in
commissioning the generation unit. Management maintained that such
notifications are not yet “industry norm” but would be issued on a case-by-case
basis.
Revising estimates 5-6% upwards in FY11E and FY12E
We are revising our earnings estimates upwards by 5% in FY11E and 6% in FY12E:
 Following the increased capacity addition in 1HFY11E (Rs45.3bn), we revise our
operational capacity estimate for FY11E from Rs45bn to Rs71bn. We maintain
our addition-to-operation-capacity estimate of Rs160bn for FY12E.
 STOA revenue estimates are revised upwards by 48% for FY11E and FY12E.
Valuations
 We expect the operational capacity addition to be back-ended and expect a
significant increase in regulated equity in FY12. Our SOTP-based TP of
Rs126/share is based on: a) valuing regulated equity in the transmission projects
at a P/B of 2.5x FY12E and CWIP at P/B of 0.5x FY12E, b) other businesses like
telecom and consultancy at 15x FY12E and c) cash and investment at 1x FY12E.
 We have factored in a dilution of 10% of the equity at Rs110/share in FY11.