Power Grid Regulatory precedent positive :: RBS

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Power Grid
Regulatory precedent positive
PGCIL reported in  line 2Q results,  while the regulatory precedent set in the
quarter was positive. We expect project execution and asset capitalisation, both
key to earnings, to pick up in the next couple of years. We continue to like this
stock as a defensive in the transmission space. Maintain Buy.


2Q11 numbers in line; regulatory precedent is positive for the company
Power grid reported 2Q11 of at Rs21.3bn, however, adjusted for one-offs, revenue came in
at Rs19.6bn in line with our estimates. The company reported PAT at Rs6.5bn, while
adjusted PAT came in at Rs5.7bn (up 22.6% yoy) slightly ahead of our estimates. We note
that asset capitalisation has picked up 1H11 with a cRs35bn addition to net fived assets in
the period. The key positive in the quarter has been the regulatory decision whereby the
company has been allowed to capitalise its transmission system at Kudankulam, despite the
generating unit of Nuclear Power Corporation not being ready. This can be viewed as a
regulatory precedent for future projects, such that Powergrid can capitalise projects despite a
delay in generation. This adds to the defensiveness of the company’s earnings.
Project execution likely to speed up; remains key for future earnings growth
During FY10, the company incurred capex of Rs101bn on various transmission projects in
line with our estimates. However, the projects commissioned during the year stood at
c.Rs36bn, lower than our estimates for the year of cRs50bn. This is due to the fact that a
significant portion of the capex during the year has been locked into CWIP. We believe
capitalisation is likely to pick up in the next two years as we approach the end of current five
year plan. We estimate the company will incur another Rs256bn of capex in the next two
years. We believe the timely execution of these projects is key for company’s earnings.
Introducing FY13 numbers; stock remains a defensive play on the T&D capex
We have adjusted our FY11F and FY12 numbers due to lower asset capitalisation in FY10
(Table 3). We also introduce our FY13 numbers. We maintain our Buy with a target price of
Rs118. We continue to favour the stock as the regulated returns give it a steady, non-volatile
growth profile. The stock trades at 2.5x FY11F on price to book.