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Power Grid Corp of India Limited
'Higher Orbit' of Capex
Investment rationale
Moving into higher orbit
PGCIL is moving into higher capex mode in order to meet the transmission
capacity requirements for the next two years and XIIth Five-Year Plan. Post its
successful IPO in FY08, the company has increased its average capital
expenditure (FY08-10) to INR84bn from INR36bn in the Xth Five-Year Plan.
PGCIL intends to increase its capital expenditure to INR120bn and INR150bn
by FY11e and FY12e, respectively. The equity infused via FPO and internal
accruals addresses the equity requirements in medium term.
Earnings will get a boost by higher commissioning in FY11e and FY12e
We expect all construction work in progress (CWIP) (~INR200bn in PGCIL's
books as on Mar’10) to get commissioned over the next 5-6 quarters and
estimate the commissioning to be INR206bn in FY11-12e. Although the capex
has been on a higher level at INR80bn and INR100bn in FY09 & FY10
respectively, commissioning during corresponding years has been at lower
levels of INR49bn and INR29bn. However, as the commissioning cycle ranges
between 18-24 months, commissioning is likely to improve in FY11-12e.
Huge visibility in project pipeline
PGCIL is executing 68 transmission projects worth INR817bn, which are in
various phases of implementation. Further, CERC has already approved high
capacity power transmission corridor (HCPTC) which will be implemented in
the next Five-Year Plan at a cost of INR580bn. PGCIL has most of its assets
regulated by CERC, thus returns will be protected for existing and new capex.
Valuation and outlook
We have ascribed a multiple of 18x and 2.25x for FY12e on a PE and a PB
basis respectively, and arrived at a fair value of INR116. In the past three
years, the average PE and PB has been in the range of 17-23x and 2-2.6x
respectively.
Investment rationale
Capex : Moving into higher orbit
PGCIL's capital expenditure in Xth Five-Year Plan was INR180bn, which tripled in
XIth Plan to INR550bn and is expected to double to ~INR1,200bn in the next plan.
It incurred a capital expenditure of ~INR36bn per annum on an average during
FY03-07. Post its successful IPO in FY08, the company has increased its average
capital expenditure (FY08-10) to INR84bn from INR36bn in the Xth Five-Year Plan.
It is expected to invest INR120bn and INR150bn in FY11e and FY12e, respectively.
The equity required for these projects would be in the range of INR40-50bn. However,
the company generates cash accrual of ~INR20-25bn per annum presently. FPO
proceeds (of INR37bn) and internal accruals would meet the equity requirement for
the next two years.
Earnings to boost by higher commissioning in FY11e and FY12e
We expect all construction work in progress (CWIP) (~INR200bn in PGCIL's books as
on Mar 31, 2010) to get commissioned over the next 5-6 quarters and estimate the
commissioning to be ~INR206bn in FY11e-12e. Although the capex has been on a
higher level at INR80bn and INR100bn in FY09 and FY10, respectively, commissioning
during corresponding years has been at lower levels of INR49bn and INR29bn.
However, as commissioning cycle ranges between 18-24 months, it is likely to improve
in FY11-12e. Graph of Xth Five-Year Plan clearly depicts that healthy capex during
FY03-05 translated into huge commissioning during FY06-07. In the Xth Five-Year
Plan, 63.8% of the commissioning happened in FY06 and FY07. PGCIL has
commissioned INR48bn in 1HFY11 compared to INR26bn in 1HFY10.
Huge visibility in project pipeline
Existing projects
PGCIL is executing 68 transmission projects which are at various phases of
implementation. These projects are being built at a cost of INR817bn and incurred
capex till Sep 30, 2010 is INR236bn. These projects will add 40,000 circuit kilometers
and 65 substations with a total power transformation capacity of 106,000MVA. The
further capex requirement for these projects is INR581bn.
Future projects
Further, CERC has already approved High Capacity Power Transmission Corridors
(HCPTCs) to be implemented in the next Five-Year plan at a cost of INR580bn.
Valuation and outlook
We have ascribed a multiple of 18x and 2.25x for FY12e on a PE and a PB basis,
respectively, and arrived at a fair value of INR116. In the past three years, the average
PE and PB has been in the range of 17-23x and 2-2.6x, respectively. The stock provides
~18% upside from the current market price of INR98 over the next one year.
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