Power Grid: Retain Underperform. ahead of FPO:: Macquarie Research,

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Power Grid Corporation of India
Do you think the market will dive?
Event
 That is the only reason you would buy the stock ahead of the Follow-on Public
Offer (FPO), in our opinion. The 2Q11 result was in line with our forecasts,
with adjusted EBITDA coming in 2% below our estimate. The tone at the
analyst presentation was bullish as expected, highlighting that Rs51bn
(US$1.1bn) of assets were commissioned in 1H10.
 The stock has underperformed the Nifty by 17% since May, and we cannot
see the stock materially outperforming leading into the FPO, bar the market
materially falling. Trading on 19x FY11E NPAT and 16.5x FY12E NPAT, the
stock is not cheap vs. the sector, and we retain our Underperform.
Impact
 Adjusted NPAT of Rs6.0bn, after stripping out one-off impact of tariff in
arrears from Kudankulam, which was ~3% lower than consensus and around
7% higher than our forecast. From an operational level, both EBIT and
EBITDA were in line with our forecasts.
 Rs51bn (US$1.1bn) assets commissioned this half: PWGR provided a list
of the projects that have been commissioned this quarter, with Barh
Transmission System by far the biggest at Rs26bn (~70% of assets
commissioned in 2Q). Speaking to management afterwards, it appeared that
not all of this project may be generating transmission revenue at the moment.
 Will the Kudankulam order be a precedent? The CERC has allowed
PWGR to realise transmission tariffs, despite the respective generation
project being delayed. Our view is that such orders will be made on a projectby-
project basis, while future delays to transmission investment would likely
occur earlier in the investment cycle due to issues around land acquisition,
environmental and forest clearance and fuel availability.
 Ongoing risk to bullish capex growth: Management noted in the analyst
meeting that, in terms of asset commissioning, in FY11 it expects to double
what it has delivered in recent years. We already assume that capitalised
CWIP will triple in FY11 and continue growing at 18% pa for the following five
years.
Earnings and target price revision
 Earnings increased by 2–3% in FY11E/12E following reduction in interest
cost. We have upgraded our price target to Rs91/share from Rs83/share.
Price catalyst
 12-month price target: Rs91.00 based on a Sum of Parts methodology.
 Catalyst: Dilutionary 10% Follow-on-Public (FPO) offer and 10% fresh equity
issue next month.
Action and recommendation
 Retain Underperform. The stock is trading at 19x FY11 NPAT and 16.5x FY12
NPAT forecasts, which we think largely factors in the bullish capex outlook.
We have upgraded our price target to Rs91/share after rolling forward our
valuation.