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Power Grid Corporation of India (PGRD.BO)
Upgrade to Buy (1L) – On Stock Underperformance
Upgrade to Buy (1L) — From Hold (2L) to factor in: 1) 32% underperformance v/s
BSE Sensex over last six months, 2) its scarcity value, as it is the only listed play
on the regulated transmission business in India vis-a-vis plenty of generation
options, 3) PGCIL trades at P/BV of 2.1x FY12E, a 22% discount to the hist av of
2.7x 1 year forward, 4)EPS CAGR of 17% over FY10-13E with av RoEs of 14.8%.
Target price Rs117 — We adjust our target price to Rs117 to factor in (1) 4-6%
EPS cut over FY11E-13E, (2) cut in our target P/BV multiple to 2.5x from 2.7x
earlier as we expect average RoEs to come off over FY11E-13E post the FPO, and
(3) roll forward of our target P/BV multiple to Mar12E from Mar11E earlier.
Our top picks in India Electric Utilities – PGCIL, Tata Power (TTPW.BO;
Rs1,391.65; 1L) and CESC (CESC.BO; Rs392.05; 1M), in that order of preference.
1HFY11 Recurring PAT up 28% YoY — PGCIL’s 1HFY11 fixed asset capitalization
was Rs52.88bn up 120% YoY from Rs24bn in 1HFY10. This helped 1HFY11
Recurring PAT at Rs12.9bn grow 28% YoY.
Capitalization set to accelerate in last 2 years of XIth plan — After FY08, PGCIL’s
capitalization rate has come off on account of delays in generation addition. This
is set to increase in the last 2 years of the XIth Plan on account of (1) pick up in
generation additions and (2) regulatory precedent in 2QFY11 (see bullet below).
FPO closing on 12 Nov could also be a key positive catalyst.
Significant regulatory precedent — In 2QFY11, PGCIL received in-principle
approval for the Kudankulam nuclear plant where transmission capacity was
declared commercial in April 2009, despite generation capacity not being
operational. This will enable PGCIL to approach the regulator in other such
instances, and the impact on transmission returns due to delays in generation
projects should be minimized.
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