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Meaningful acceleration in capitalization to drive core earnings
Expect PGCIL’s regulated asset base to increase from Rs113b as at March 2010
to Rs173b by FY12 (up 50%+); driving 15% EPS CAGR till FY12
Bunching up of private sector generation capacity addition driving accelerated
execution: Given the expectations of accelerated pace of generation capacity
additions with 120GW of projects under construction, we expect step-up in investments
towards transmission. CERC has recently approved setting up of nine high speed
transmission corridors (HSTCs). PGCIL is setting up these corridors, aimed at
evacuating electricity from 38 private sector players putting up an aggregate generation
capacity of ~42GW. Since most of this ~42GW capacity is likely to be commissioned
over the next 3-4 years, and transmission infrastructure needs to come up in tandem,
it would necessitate accelerated execution by PGCIL. Business visibility for PGCIL
has improved meaningfully.
Capitalization of Rs200b over FY11-12 to drive near-term earnings: We expect
PGCIL to achieve the capex of Rs550b targeted under the Eleventh Plan, despite
meaningful delays in generation capacity additions, given the incremental capex
towards HSTCs. During FY08-10, PGCIL's capex was Rs254b and the targeted
spending in FY11-12 is Rs286b. Also, under the Twelfth Plan (FY13-17), targeted
capex stands at Rs1t+, ~2x the Eleventh Plan capex. For PGCIL, order awards have
been Rs150b-200b per year during FY09/FY10, and we expect the trend to accelerate.
In comparison, the addition to gross block during this period has been an average of
Rs33b per year, indicating a meaningful ramp-up going forward (we estimate Rs100b
per year during FY11/FY12, ~3x the FY09/10 levels). CWIP as at March 2010 stands
at Rs200b, ~47% of the gross block.
Telecom tower usage - not much upside: PGCIL is exploring possibilities of entering
the telecom tower business. It has ~150,000 towers, but we understand that a large
proportion of these are in forest areas, remote areas, etc without any meaningful
catchment population. The revenue potential of this business could possibly be Rs4.5b-
5b. Given that a large part could possibly be shared with distribution utilities, the
residue value with PGCIL may not be meaningful.
Expect EPS CAGR of 15% till FY12; cutting estimates: We expect PGCIL's regulated
asset base (RAB) to increase from Rs113b as at March 2010 to Rs173b by FY12 (up
50%+), with projects of ~Rs200b being commissioned and capitalized in this period.
We expect the company to report a net profit of Rs26.6b in FY11 (up 15%) and
Rs33.3b in FY12 (up 25%). Given the delays in terms of asset capitalization and post
factoring in possible equity dilution, we marginally cut our EPS estimates by 4% for
FY11 to Rs5.7 and by 6.8% for FY12 to Rs7.2. We maintain Buy with a target price of
Rs123.
Bunching up of private sector generation capacity addition to drive
accelerated execution for PGCIL
Given the accelerated pace of generation capacity additions, we expect step-up in
investments towards transmission. The Open Access Policy now stipulates that any
generating plant having installed capacity of over 250MW and any bulk consumer having
a minimum load of 100MW can seek connectivity to the interstate transmission system.
This will further drive investments in the transmission sector. Private sector participation
in the transmission segment has been limited and PGCIL caters to a sizeable part of the
opportunity pie. Further, PGCIL, being the Central Transmission Utility, has been designated
as the nodal agency for processing the requests for long-term open access to the interstate
transmission system.
In May 2010, CERC approved the setting up of nine high-speed transmission corridors
(HSTCs) for evacuating power from the upcoming generation stations in the coal belt of
Orissa, Jharkhand, Chhattisgarh; hydro power project in Sikkim and coastal projects in
Andhra Pradesh and Tamil Nadu. These nine corridors are being set up by PGCIL and
are aimed at evacuating electricity from 38 private developers putting up generation capacity
of ~42GW. Given that a large part of these capacities are expected to be commissioned
over the next 3-4 years, the transmission spending has to be matched in-line with the
project commissioning, entailing accelerated execution by PGCIL.
Expect PGCIL to achieve Eleventh Plan capex target, despite meaningful
delays in generation capacity additions
We expect PGCIL to achieve the capex of Rs550b targeted under the Eleventh Plan,
despite meaningful delays in generation capacity additions. This is largely due to incremental
capex towards transmission projects linked to generation capacities being set up by private
sector entities, which were not part of the original estimates. Also, ~40% of PGCIL's
capex is towards system strengthening, not completely linked to generation capacity additions.
During FY08-10, PGCIL's capex stood at Rs254b and the targeted spending in FY11-12
is Rs286b.
For the Twelfth Plan (FY13-17), the management stated that the targeted capex stands at
Rs1t+, which is ~2x the Eleventh Plan capex. This is being driven by investments in
HSTCs (largely for private IPP projects), system strengthening, etc.
Capitalization of Rs200b during FY11-12 to drive near-term earnings
As per the regulatory norms, PGCIL earns RoE on assets capitalized, and not on capital
work in progress (CWIP). Hence, the quantum of capitalizations is an important determinant
of PGCIL's earnings trend.
Fixed asset capitalization stood at Rs37b in FY09 and Rs31b in FY10, and was impacted
by delays in generation capacity additions. When generation capacities are delayed, PGCIL
also slows down the pace of transmission capex. As a result, PGCIL's CWIP ballooned to
Rs204b (47% of gross fixed assets) in FY10.
We expect the pace of capitalization to improve in FY11/FY12 to Rs100b per year, given
the improved pace in generation capacity additions. Since 30% of its capex is funded
through equity, this will lead to an addition of Rs70b to the regulated asset base (up 74%
from current levels), driving medium-term earnings growth.
Telecom tower usage - how much upside?
PGCIL is exploring possibilities of entering the telecom tower business. It has ~150,000
towers, but we understand that a large proportion of these are in forest areas, remote
areas, etc without any meaningful catchment population. Media reports indicate that 15,000-
20,000 towers can be commercially used. PGCIL has appointed KPMG to prepare a
business plan and business model to move forward.
The revenue potential of this business could possibly be Rs4.5b-5b. Given that a large part
could possibly be shared with distribution utilities, the residue value with PGCIL may not
be meaningful. We have not factored in any possible upsides in our estimates.
Equity dilution necessary to achieve Eleventh Plan capex targets
PGCIL intends to raise ~Rs86b through an FPO in 2HFY11, entailing 10% equity dilution
and 10% stake sale by the government. This will enable the company to meet its capital
commitments during FY11-12. PGCIL's DER stands at 1.95x as at March 2010. Given
the capex plans of Rs286b during FY11-12, PGCIL will need equity funding of Rs60b.
The equity shortfall for PGCIL stands at Rs30b-32b. Delays in terms of fund raising
beyond FY11 will entail lower equity contribution in the projects (at say ~80:20 DER, v/s
CERC-approved 70:30), impacting the earnings potential of the assets. We have factored
in 10% equity dilution by PGCIL in FY11, raising Rs44b (issue price: Rs104/share). Together
with internal accruals, this will provide sufficient cash flows to finance equity investments
till FY14/FY15.
EPS CAGR of 15% till FY12, cutting estimates
We expect PGCIL's regulated asset base (RAB) to increase from Rs94b as at March
2010 to Rs140b by FY12 (up 50%), with projects of ~Rs200b being commissioned and
capitalized in this period. This will lead to corresponding increase in regulatory returns.
We expect the company to report a net profit of Rs26.6b in FY11 (up 15%) and Rs33.3b
in FY12 (up 25%). Earnings growth will be driven by a 25% CAGR in transmission earnings
till FY12. Our net profit CAGR estimate is lower than our transmission earnings CAGR
estimate due to: (1) increased corporate debt towards shortfall in equity funding for Eleventh
and Twelfth Plan projects, and (2) lower other income, given conversion of cash into
CWIP.
Given the delays in terms of asset capitalization and post factoring in possible equity
dilution, we marginally cut our EPS estimates by 4% for FY11 to Rs5.7 and by 6.8% for
FY12 to Rs7.2.
Valuations attractive; maintain Buy
We have valued PGCIL based on the average of our DCF valuation (one-year forward)
and SOTP valuation to arrive at a target price of Rs123/share. The stock trades at 18x
FY11E and 15x FY12E EPS, and 2.2x FY11E BV and 2x FY12E BV.
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