Power Grid Corp Of India OW: Strong outlook, expansion plans on track  HSBC

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Power Grid Corp Of India
OW: Strong outlook, expansion plans on track
 Tendering for high capacity corridor (HCPTC) starts in 2HFY12,
hence we do not expect any capex slowdown in FY13
 Appointment of senior positions in advanced stages, hence
concerns regarding slowdown in decision making appear
unfounded
 Target price unchanged at INR130; reiterate Overweight rating
We reiterate PGCIL Capex will be on track in FY12-13: We expect PGCIL to complete
the Eleventh five-year plan ending FY12 with total capex of INR520bn (target was
INR550bn), a c177% increase over the last plan period. Further, as the company is expected
to start its tendering process for high capacity corridor (HCPTC) in H2FY12 (details in page
3-4), and expects significant capex on this project in FY13 (INR15bn) we do not see any
slowdown in capex for FY13( first year of Twelfth plan). We have, however, taken a more
conservative view and our total Capex estimate for FY13 is INR13.5bn and currently we
maintain our estimate. We also maintain our Capex estimate of INR800bn for the Twelfth
plan period (FY13-17) against the company guidance of INR1,100-1,200bn
Senior level vacancies not causing any delays in decision making- The company has
reaffirmed that the vacancy of some senior positions and the delay in an announcement of
a replacement for the outgoing Chairman has not been the reason for any delay in its
project execution or tendering. We believe given that large PSUs have a self operating
work flow system, most of the regular business is not impacted. At most, the impact is felt
on the planning and strategy, which is unlikely to impact its capex in FY12-13.
Shortage of trained manpower has marginally increased the execution cycle- With
rising capex, the sub-contractors of PGCIL are facing a shortage of skilled workforce,
which has marginally lengthened the project execution cycle. PGCIL currently has
INR26bn in CWIP and as per our estimate, the average conversion time period to
operating asset is c30months. We expect new asset creation of INR100bn in FY12 and
INR117bn in FY13.
We maintain our target of INR130 using DCF (assuming COE of 12% and terminal
growth of 3%) and reiterate our OW rating on the stock. Key downside risks include
longer than expected delays in project commissioning impacting earnings.