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Power Grid – FPO Note
Angel Broking recommends a Subscribe on Power Grid FPO
Power Grid Corporation (PGCIL) is a principal electric power transmission
company owning and operating more than 95% of the country’s inter-state
and inter-regional electric power transmission systems. As of September 30,
2010, PGCIL operated a network of 79,556 circuit kilometers at 765kV,
400kV, 220kV and 132kV EHV AC and +/- 500kV HVDC.
Rev up in commissioning of generation projects to improve RoE’s: PGCIL’s tariffs
are computed as per the CERC norms, based on which it is eligible for returns on
the capitalised assets. The capitalisation of PGCIL’s assets was delayed in the first
two years of the Eleventh Plan (`2,000cr out of `6,000cr of equity portion in
capex was delayed) due to slow execution of the generation projects. However,
going ahead, the company’s profits are set to expand with the commissioning of
new generation projects gaining momentum. PGCIL capitalised `5,088cr worth of
projects in 1HFY2011 as against `2,440cr capitalised in 1HFY2010. Moreover,
the increase in the RoE ceiling for transmission companies to 16% by CERC for
FY2010-14E is expected to lend significant boost to the company’s profitability.
The company’s RoE is set to expand from 16.4% in FY2010 to 18.1% in FY2012.
The additional RoE of 2.1% over the CERC prescribed rate is due to 1.7%
contributed by short-term open access and 0.4% from its consultancy business.
Increasing government focus on sector to drive growth: While an investment of
`1,40,000cr has been planned for the transmission sector in Eleventh Plan, the
Twelfth Plan envisages higher investment to the tune of `2,40,000cr. In line with
this increasing allocation to the transmission sector, PGCIL plans to add close to
`55,000cr and `1,10,000cr worth of assets during the Plans, i.e. several
times more than `8,500cr and `18,900cr invested during the Ninth and
Tenth Plans. On the back of the same, over FY2010-12, we expect PGCIL to
log 20.1% CAGR in top-line.
Attractive valuation: At the upper price band, PGCIL is available at P/BV of 1.7x
and P/E of 12.2x on FY2012 estimates. Our fair value works out to Rs105,
implying a Target P/BV multiple of 2.0x. We believe that the issue is well-priced
relative to NTPC (RoE’s determined by CERC norms), which is available at P/BV of
2.1x and P/E of 16.9x based on FY2012 estimates. Given the increasing
opportunity in the sector, assured return ratios coupled with lower operational
risks and attractive valuations, we recommend Subscribe to the FPO.
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