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Power Grid Corporation of India
The ‘go-to guy’ in trying times
Event
Buying PWGR is a consensus call at the moment as concerns gather over
equity erosion of IPPs. This appears to be largely a relative call for the sector,
with PWGR looking fairly priced in our view. We’re expecting a relatively
strong result with little surprise heading into 4Q11 results, although as the
stock gets closer to Rs.110 vs. our share price target of Rs.100 we would opt
to take profits into strong FY11 results. Currently the stock is trading at 16.5x
FY12E NPAT vs. medium term EPS CAGR of 15%.
Pair traders may consider going long-NTPC, short-PWGR, which may play
out post results. The ratio of PWGR/NTPC share price is at historical highs
between the highly correlated stocks.
Impact
Solid numbers in FY11: we forecast FY11 NPAT of Rs.25.5bn (US$576m),
which is slightly below consensus of Rs.26.1bn. Focus areas of the result will
be on orders placed in 4Q11 (management noted it could make up to
Rs.200bn in FY11 at 3Q11 results, which would support 12th plan capex
ambitions) and capitalisation of CWIP over the quarter (we estimate Rs18bn).
Management catch-up: not a lot to report – comfortable with FY11 capex of
Rs.119bn while capex for FY12 may come in below Rs.177bn target. PWGR
management agrees that the telecoms tower business won’t drive medium
term value, with the first round of tower leasing to make up <1% to group
revenues.
Technical short against NTPC?: whilst we rarely look for pair trades in the
Indian Utilities space due to a lack of stock correlations, PWGR and NTPC
(NATP IN, Rs.183.80, OP, TP: Rs.248) are the exception - highly correlated
(0.9) and have traded at historically low ratios which could support a long-
NTPC, short PWGR trade.
Why it’s defensive: qualitatively, the risks to PWGR’s earnings are much
lower than other Indian utilities, partly due to the Tripartite Agreement
between the Government of India, SEB’s and Central Sector Utilities (lower
counterparty risk) in addition to non-direct fuel supply exposure.
Earnings and target price revision
We have slightly raised our FY11 NPAT (+5%) due to bringing down our noncash
depreciation forecast (+3%) and reducing interest expense (+2%).
Price catalyst
12-month price target: Rs100.00 based on a Sum of Parts methodology.
Catalyst: project delays will lead to delay in transmission execution
Action and recommendation
With the stock trading at a 5% premium to our price target, we retain our
Neutral recommendation and would suggest taking profits should the stock
rally further into results.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Power Grid Corporation of India
The ‘go-to guy’ in trying times
Event
Buying PWGR is a consensus call at the moment as concerns gather over
equity erosion of IPPs. This appears to be largely a relative call for the sector,
with PWGR looking fairly priced in our view. We’re expecting a relatively
strong result with little surprise heading into 4Q11 results, although as the
stock gets closer to Rs.110 vs. our share price target of Rs.100 we would opt
to take profits into strong FY11 results. Currently the stock is trading at 16.5x
FY12E NPAT vs. medium term EPS CAGR of 15%.
Pair traders may consider going long-NTPC, short-PWGR, which may play
out post results. The ratio of PWGR/NTPC share price is at historical highs
between the highly correlated stocks.
Impact
Solid numbers in FY11: we forecast FY11 NPAT of Rs.25.5bn (US$576m),
which is slightly below consensus of Rs.26.1bn. Focus areas of the result will
be on orders placed in 4Q11 (management noted it could make up to
Rs.200bn in FY11 at 3Q11 results, which would support 12th plan capex
ambitions) and capitalisation of CWIP over the quarter (we estimate Rs18bn).
Management catch-up: not a lot to report – comfortable with FY11 capex of
Rs.119bn while capex for FY12 may come in below Rs.177bn target. PWGR
management agrees that the telecoms tower business won’t drive medium
term value, with the first round of tower leasing to make up <1% to group
revenues.
Technical short against NTPC?: whilst we rarely look for pair trades in the
Indian Utilities space due to a lack of stock correlations, PWGR and NTPC
(NATP IN, Rs.183.80, OP, TP: Rs.248) are the exception - highly correlated
(0.9) and have traded at historically low ratios which could support a long-
NTPC, short PWGR trade.
Why it’s defensive: qualitatively, the risks to PWGR’s earnings are much
lower than other Indian utilities, partly due to the Tripartite Agreement
between the Government of India, SEB’s and Central Sector Utilities (lower
counterparty risk) in addition to non-direct fuel supply exposure.
Earnings and target price revision
We have slightly raised our FY11 NPAT (+5%) due to bringing down our noncash
depreciation forecast (+3%) and reducing interest expense (+2%).
Price catalyst
12-month price target: Rs100.00 based on a Sum of Parts methodology.
Catalyst: project delays will lead to delay in transmission execution
Action and recommendation
With the stock trading at a 5% premium to our price target, we retain our
Neutral recommendation and would suggest taking profits should the stock
rally further into results.
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