Power: Buy PGCIL: Top PICKS post Correction- ENAM: India Strategy

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Power: Buy PGCIL
􀂙 A natural “monopoly” with a “take-or-pay” biz model: PGCIL owns ~95% of India’s inter-regional transmission assets
and operates on a “take-or pay” model. Its earnings are linked to availability of transmission assets and NOT power
flow. Recently, PGCIL’s scope has been expanded from ~1/3 of India’s capacity to about 85% of upcoming capacity
by linking conferring it to link Private sector projects from just CPSUs (like NTPC)

􀂙 Equity dilution to enhance growth visibility: B/S was leveraged at 2.1x and hence growth = RoE = ~15%. In the FPO,
the company has raised ~$840 mn enhancing its growth visibility to 20% p.a.
􀂙 Expect earnings CAGR of ~20% during FY10-13: PGCIL earns a core RoE of 17% on transmission assets & hence
earnings are correlated to commissioning of assets. We expect commissioning to zoom from ~Rs 30 bn in FY10 to
~Rs 100 bn in FY11, ~Rs 120 bn in FY12 and ~Rs 192 bn in FY13
􀂙 RoE expansion through merchant power sales: PGCIL captures the merchant power opportunity thru sale of its spare
capacity on a short-term open access basis. It charges avg ~Rs 0.16/kWh and retains 25% of it and there are NO
RoE caps. An expected increase in merchant power would aid PGCIL’s RoE expansion. In FY10, income ST
contributed ~100bps to its core transmission RoE

􀂙 New CERC ruling does away with the risk of stranded assets: In a recent judgment, CERC has allowed PGCIL to bill
its customer retrospectively from the original CoD, even if the generation is delayed
􀂙 BUY with a target price of Rs 125 (27% upside): We have valued PGCIL at Rs 125/sh based on P/B of 2x FY12E
core equity in transmission assets 17% core RoE and 7% LT growth