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Power Grid Corporation of India (PGRD.BO)
Buy: Delivers a Solid Quarter of Growth
Recurring PAT up 22% YoY — At Rs5.9bn, which was marginally ahead of CIRA
expectations, led by 21% sales growth and stable EBITDA margins. 1HFY11 asset
capitalization at Rs52.88bn was up 120% YoY. We anticipate finding out the
capitalization in 3QFY11 in the analyst meet tomorrow.
EPS goes down and BV moves up post FPO — We have adjusted our PAT
estimates marginally over the next 3 years. Our EPS estimates go down 7-13%
and our BV goes up 5-10% over the next 3 years to factor in the fund raising in the
recent follow on public offering (FPO).
Target price adjusted to Rs118 — From Rs117 as we: (1) factor in our EPS and
BV revision over FY11E-13E, (2) cut our target P/BV multiple to 2.3x from 2.5x
earlier as the FPO lowers average RoEs by 122-305bps over the next 3 years and
(3) roll forward our target P/BV multiple to Jun12E from Mar12E earlier.
Our top picks in India Electric Utilities – Currently PGCIL and Tata Power
(TTPW.BO; Rs1,211.55; 1L) are our top picks in that order of preference. PGCIL
presents an opportunity to participate in the growth of the under-invested Indian
power sector through a solid near monopoly annuity business without the fuel
supply risk of a generator. The stock is that much more appealing in the current
volatile market.
Regulatory precedent – significant positive — In 2QFY11, PGCIL received inprincipal approval for the Kudankulam nuclear plant where transmission capacity
was declared commercial in April 2009, despite generation capacity not being
operational. This precedent should enable PGCIL to approach the regulator in
other such instances, and transmission returns being impacted due to delays in
generation projects will be minimized.
Power Grid Corporation of India
Valuation
Discounted cash-flow methodology is normally preferred when valuing an
electric utility company that has regulated earnings and cash flow streams.
However, for a company like PGCIL, which we estimate will be FCF negative
until at least FY12E and might continue to be FCF negative beyond FY12E
depending on the scale of the capex it undertakes in the XIIth Plan (FY13E –
FY17E), the DCF approach could either overestimate or underestimate the
value of the company based on the terminal year cash-flow assumptions.
The entire value would be dependent on the steady state case assumed when
growth capex stops and the company does only maintenance capex and
generates substantial amounts of cash. The DCF value would also be
extremely sensitive to the maintenance capex assumption in the terminal year.
We therefore believe P/BV valuation methodology is more appropriate.
Our target P/BV multiple is set at 2.3x FY12E which is at a ~12% discount to
the historical average P/BV multiple of 2.6x since listing, as we expect the
average RoEs to come off for at least 2-3 years post the FPO.
Risks
We rate PGCIL Low Risk, in line with our quantitative risk-rating system, which
tracks 260-day historical share price volatility.
Key upside risks are: 1) Faster-than-expected project execution leading to
earlier-than-expected capitalization of capex; 2) Higher-than-expected shortterm open access revenues due to a spurt in power trading, and 3) Higherthan-expected revenues and profitability in consulting and telecom businesses.
Key downside risks include: 1) Creditworthiness of the State Power Utilities; 2)
Changes in the regulatory environment; 3) Increased competition; and 4)
Project-related risks.
Tata Power
Valuation
Our Rs1,550 target price is based on a sum-of-the-parts approach: 1) The
parent business is valued using DCF as of March-2011E, using a WACC of
12.3% (risk free rate of 8.5%, market risk premium of 6%, beta of 1.06, D/E of
67%); 2) Tata Power's 51% stake in NDPL is valued at 2.5x FY12E P/BV; 3)
Tata Power's stake in Powerlinks is valued at 1.5x FY12E P/BV; 4) Holdings in
Tata Teleservices (Maharashtra) and VSNL are valued at a 20% discount to the
market price prices; 5) Stake in Tata Teleservices is valued at a 30% discount to
the NTT Docomo valuations; 6) Mundra UMPP using FCFE and Cost of Equity
= 12.5%; 7) The Maithon project is valued like Mundra UMPP; and 8) 30%
stake in KPC and Arutmin coal mines at FCFE and CoE = 14%.
Risks
Our quantitative risk-rating system, which tracks 260-day historical share price
volatility, assigns a Low Risk rating to Tata Power. Key downside risks to our
target price include: 1) Unfavorable judgement in the MERC order petition and
standby charges case vs. R-Infra could hit the financials; 2) Power sector is
gradually liberalizing, but regulatory and tariff structures still evolving.
Companies in the sector are vulnerable to delays, mid-term corrections and
dramatic policy changes; under the existing system, litigation following discord
may be time-consuming, and a lack of precedents adds to uncertainty; 3)
Delays and cost escalation in capacity expansion and an unfavorable interest
rate environment; 4) The nature of the Asian coal market means an inability to
fill orders or expand capacity in Indonesian coal mines will have a material
impact on profitability, as will regional coal prices; and 5) Coal mines rely
heavily on contract miners; changing relations could materially affect
operations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Power Grid Corporation of India (PGRD.BO)
Buy: Delivers a Solid Quarter of Growth
Recurring PAT up 22% YoY — At Rs5.9bn, which was marginally ahead of CIRA
expectations, led by 21% sales growth and stable EBITDA margins. 1HFY11 asset
capitalization at Rs52.88bn was up 120% YoY. We anticipate finding out the
capitalization in 3QFY11 in the analyst meet tomorrow.
EPS goes down and BV moves up post FPO — We have adjusted our PAT
estimates marginally over the next 3 years. Our EPS estimates go down 7-13%
and our BV goes up 5-10% over the next 3 years to factor in the fund raising in the
recent follow on public offering (FPO).
Target price adjusted to Rs118 — From Rs117 as we: (1) factor in our EPS and
BV revision over FY11E-13E, (2) cut our target P/BV multiple to 2.3x from 2.5x
earlier as the FPO lowers average RoEs by 122-305bps over the next 3 years and
(3) roll forward our target P/BV multiple to Jun12E from Mar12E earlier.
Our top picks in India Electric Utilities – Currently PGCIL and Tata Power
(TTPW.BO; Rs1,211.55; 1L) are our top picks in that order of preference. PGCIL
presents an opportunity to participate in the growth of the under-invested Indian
power sector through a solid near monopoly annuity business without the fuel
supply risk of a generator. The stock is that much more appealing in the current
volatile market.
Regulatory precedent – significant positive — In 2QFY11, PGCIL received inprincipal approval for the Kudankulam nuclear plant where transmission capacity
was declared commercial in April 2009, despite generation capacity not being
operational. This precedent should enable PGCIL to approach the regulator in
other such instances, and transmission returns being impacted due to delays in
generation projects will be minimized.
Power Grid Corporation of India
Valuation
Discounted cash-flow methodology is normally preferred when valuing an
electric utility company that has regulated earnings and cash flow streams.
However, for a company like PGCIL, which we estimate will be FCF negative
until at least FY12E and might continue to be FCF negative beyond FY12E
depending on the scale of the capex it undertakes in the XIIth Plan (FY13E –
FY17E), the DCF approach could either overestimate or underestimate the
value of the company based on the terminal year cash-flow assumptions.
The entire value would be dependent on the steady state case assumed when
growth capex stops and the company does only maintenance capex and
generates substantial amounts of cash. The DCF value would also be
extremely sensitive to the maintenance capex assumption in the terminal year.
We therefore believe P/BV valuation methodology is more appropriate.
Our target P/BV multiple is set at 2.3x FY12E which is at a ~12% discount to
the historical average P/BV multiple of 2.6x since listing, as we expect the
average RoEs to come off for at least 2-3 years post the FPO.
Risks
We rate PGCIL Low Risk, in line with our quantitative risk-rating system, which
tracks 260-day historical share price volatility.
Key upside risks are: 1) Faster-than-expected project execution leading to
earlier-than-expected capitalization of capex; 2) Higher-than-expected shortterm open access revenues due to a spurt in power trading, and 3) Higherthan-expected revenues and profitability in consulting and telecom businesses.
Key downside risks include: 1) Creditworthiness of the State Power Utilities; 2)
Changes in the regulatory environment; 3) Increased competition; and 4)
Project-related risks.
Tata Power
Valuation
Our Rs1,550 target price is based on a sum-of-the-parts approach: 1) The
parent business is valued using DCF as of March-2011E, using a WACC of
12.3% (risk free rate of 8.5%, market risk premium of 6%, beta of 1.06, D/E of
67%); 2) Tata Power's 51% stake in NDPL is valued at 2.5x FY12E P/BV; 3)
Tata Power's stake in Powerlinks is valued at 1.5x FY12E P/BV; 4) Holdings in
Tata Teleservices (Maharashtra) and VSNL are valued at a 20% discount to the
market price prices; 5) Stake in Tata Teleservices is valued at a 30% discount to
the NTT Docomo valuations; 6) Mundra UMPP using FCFE and Cost of Equity
= 12.5%; 7) The Maithon project is valued like Mundra UMPP; and 8) 30%
stake in KPC and Arutmin coal mines at FCFE and CoE = 14%.
Risks
Our quantitative risk-rating system, which tracks 260-day historical share price
volatility, assigns a Low Risk rating to Tata Power. Key downside risks to our
target price include: 1) Unfavorable judgement in the MERC order petition and
standby charges case vs. R-Infra could hit the financials; 2) Power sector is
gradually liberalizing, but regulatory and tariff structures still evolving.
Companies in the sector are vulnerable to delays, mid-term corrections and
dramatic policy changes; under the existing system, litigation following discord
may be time-consuming, and a lack of precedents adds to uncertainty; 3)
Delays and cost escalation in capacity expansion and an unfavorable interest
rate environment; 4) The nature of the Asian coal market means an inability to
fill orders or expand capacity in Indonesian coal mines will have a material
impact on profitability, as will regional coal prices; and 5) Coal mines rely
heavily on contract miners; changing relations could materially affect
operations.
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