POWER GRID CORP OF INDIA-- A good bet: Edelweiss

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POWER GRID CORP OF INDIA
A good bet


􀂃 ~INR 76 bn FPO: 50% offer for sale and 50% fresh issue
Power Grid Corporation of India (PGCIL) plans to issue 4.2 bn fresh shares, with
the government selling another 4.2 bn shares from its stake, in the INR 85–90 /
share (at 1.8x post issue FY12 book value) price range. The resultant INR 76 bn
issue will dilute government’s stake in the company from 86.4% to 69.4%.



􀂃 Proceeds to fund INR 226 bn capex
The company intends to use the ~INR 38 bn raised to fund part of its Eleventh
and Twelfth Plan capex. It has identified 13 projects (estimated cost INR 226 bn)
of 19,081 ckm including transmission links for Sasan and Mundra UMPPs which
will be funded with the FPO proceeds. All these projects are expected to be
commissioned by FY13.

􀂃 Twelfth Plan capex slated to be ~ INR 1.2 tn
Management has guided for Twelfth Plan capex of INR 1.2 tn, since 60% of 100
GW generation capacity expected in the next Plan period has already been
ordered. Moreover, the government has entrusted PGCIL with the mandate of
building transmission corridors for private sector generation projects (~48 GW)
and 4-6 incremental UMPPs. This translates into INR 12.9 bn capex in FY11, INR
16.7 bn in FY12, and ~INR 200 bn annually thereafter.

􀂃 Targeting 18% RoE due to higher telecom and consultancy revenues
PGCIL is expecting to build on its robust transmission business expertise by
garnering consultancy business, both in India and abroad. Similarly, the
company plans to leverage its transmission towers by providing wireline and
mobile telecom connectivity services (pilot projects of which have been
successful). Earnings from these may not be more than 10% of overall PAT, but
could enhance RoEs to ~18-20% due to its low capital intensity.

􀂄 Outlook and valuations: Bright prospects; recommend ‘SUBSCRIBE’
Based on the competitive landscape and PGCIL’s track record so far, we assume
Eleventh Plan capex of INR 480 bn (~INR 120 bn each in FY11 and FY12), INR
860 bn between FY13 and FY17, and INR 1.09 tn between FY18 and FY22. With
regulated RoEs including efficiency gains at 17% we believe there is limited
earnings downside. Based on its monopoly status, short execution cycle of less
than three years for a transmission project, and strong visibility/sustainability of
earnings (~13% CAGR FY11-22E) we believe ~2x P/BV can be justified. Our post
issue FY12E book value is INR 51.4, which translates into a fair value of INR
104/share. Even at the upper band of the FPO pricing of INR 90, we believe
there is ~ 15% upside. Hence, we recommend ‘SUBSCRIBE’ to the FPO.