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We recently met the management of PGCIL. Key
highlights of the meet are as detailed below:
Targets yearly capex of ~Rs200bn during XIIth Plan
PGCIL plans to spend ~Rs200bn/year during the XIIth Plan to
meet its marginally reduced capex target of Rs1.02trn. In order to
achieve this it plans to award equipment orders worth ~Rs150-
180bn/year. This capex will be incurred on projects spilled over
from the XIth Plan, UMPPs, HPCTC lines and system
strengthening. Increased capex and capitalisation shall translate
into 16% earnings CAGR over FY11-17E.
Consultancy and telecom will be small contributors
The management hinted at stagnating growth for its consultancy
division as the government funded APDRP programme nears
completion. The company plans to offset this by undertaking fresh
assignments from different regions. The management also
expects the telecom division to witness healthy growth as more
towers are leased.
Debtor days expected to improve
Delayed payments from a few states coupled with difference in the
revenue recognition and billing translated into higher debtor days
during FY11 for PGCIL. However, this is expected to improve as
distribution tariffs are revised and billing is based on new tariff
orders.
VALUATIONS AND RECOMMENDATION
PGCIL plans to capitalise its huge FY11 CWIP over the next couple
of years, thus providing a clear view of growth in regulated equity
over FY12-13. This coupled with its ongoing capex provides strong
visibility on its earnings going forward. We expect its
capitalisation run rate to improve during the XIIth Plan period, thus
aiding 16% earnings CAGR over FY11-17E. We reduce our
consultancy division estimates marginally to reflect a muted
growth going forward. Re-iterate ‘BUY’ with a marginally reduced
target price of Rs120/share from Rs122/share earlier.
Stagnating growth in consultancy, but telecom to remain healthy
With APDRP programme nearing completion, PGCIL’s consultancy income is expected to
stagnate going forward. In order to maintain growth for this division, the management plans
to undertake fresh assignments from other regions. It is currently providing consultancy
services in UAE, Nigeria and Bangladesh and has been participating in projects funded by
ADB, The World Bank and other organizations in various countries like Vietnam, China,
Kenya, Ethiopia, Uzbekistan, Afghanistan and Bangladesh. During FY11, PGCIL bagged 45
new assignments having project cost of ~Rs6bn. We expect the division to continue to
contribute revenues of ~Rs3bn during FY12.
The telecom division is expected to witness healthy growth as more towers are leased out, as
it benefits from a well spread transmission network. In the first phase, tower space has been
leased out in three states – J&K, Himachal Pradesh and Punjab – for installation of telecom
antennas. In addition it earns revenues from leasing its network for broadband services.
PGCIL has been awarded Rs9bn, 10 year, contract from the government to build last mile
connectivity connecting all government institutes under the National Knowledge Network
programme. We expect the division to contribute revenues of ~Rs2bn during FY12.
Deteriorating debtor days, expected to improve going forward
PGCIL experienced longer debtor days during FY11 at 141 days against 115 days in FY10. This
was due to recognising revenues as per the new tariff norms while billing as per the older
norms. This situation has worsened during the initial months in FY12 too with Delhi, Tamil
Nadu, Bihar and some North Eastern states availing the 60 days grace period for clearing
their dues. PGCIL’s FY11 annual report indicates that Delhi, Daman & Diu and some of the
North Eastern states continue to default beyond 60 days. The management expects this to
improve going forward as distribution tariffs are revised and billing happens based on the
new tariff norms. PGCIL has recently received most of the tariff orders, thus indicating
normalised debtor days in future.
Secured payment mechanism
PGCIL, along with NTPC, benefits from the tripartite agreements with RBI and the respective
state governments which secures it from the payment risk. Under this agreement, each SEB
is required to establish and maintain a letter of credit in the company’s favour with a
commercial bank. The letter of credit should cover 105% of the preceding 12 months average
monthly billing and is required to be updated twice every year.
Risks to growth
Although we believe PGCIL will be able to undertake capex of at least Rs720bn (72% of the
targeted capex) over the next plan period, our earnings estimate stand at risk owing to 1)
delays in generation capacity addition, 2) low coal supplies to fire the stations, 3) slow
environmental and right of way clearances, 4) delays in land acquisition and 5) nonallowance
to bill beneficiaries for an unutilized line. PGCIL has already been billing the
beneficiary state despite delays in commissioning the NPCIL plant. The management
proposes to implement this for NTPC’s Koldam and NHPC’s Parabati projects too, where the
transmission lines are almost ready.
Takeaways for ancillary players
The management highlighted that competition among the vendors has remained fierce. As of
date the company has over 50 vendors supplying conductors and towers and over 35 for
substation contracts. PGCIL also mentioned that competition may be compromising on
margins in the bid to bag transmission orders
Secured cash flow business makes it the best bet in turbulent times
We believe PGCIL shall be able to meet at least 72% of its targeted capex during the next plan
period. Continuing to operate under the regulatory framework, it generates safe and steady
cash flow unlike its generation peers. Moreover, PGCIL scores over its generating peers as it
is one of the few companies moving ahead to meet its capex target for the XIth plan. We
expect the company to generate operating cash flow of ~Rs66bn and Rs76bn during FY12
and FY13 respectively which will largely take care of its equity requirement for these years.
This ramp up in capex, corresponding increase in its regulated equity, higher incentive and
STOA income should translate into 17% earnings CAGR over FY11-13E. Maintain PGCIL as
our Top Pick in turbulent market conditions; re-iterate BUY with a target price of Rs120/share
– representing an upside of 26%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We recently met the management of PGCIL. Key
highlights of the meet are as detailed below:
Targets yearly capex of ~Rs200bn during XIIth Plan
PGCIL plans to spend ~Rs200bn/year during the XIIth Plan to
meet its marginally reduced capex target of Rs1.02trn. In order to
achieve this it plans to award equipment orders worth ~Rs150-
180bn/year. This capex will be incurred on projects spilled over
from the XIth Plan, UMPPs, HPCTC lines and system
strengthening. Increased capex and capitalisation shall translate
into 16% earnings CAGR over FY11-17E.
Consultancy and telecom will be small contributors
The management hinted at stagnating growth for its consultancy
division as the government funded APDRP programme nears
completion. The company plans to offset this by undertaking fresh
assignments from different regions. The management also
expects the telecom division to witness healthy growth as more
towers are leased.
Debtor days expected to improve
Delayed payments from a few states coupled with difference in the
revenue recognition and billing translated into higher debtor days
during FY11 for PGCIL. However, this is expected to improve as
distribution tariffs are revised and billing is based on new tariff
orders.
VALUATIONS AND RECOMMENDATION
PGCIL plans to capitalise its huge FY11 CWIP over the next couple
of years, thus providing a clear view of growth in regulated equity
over FY12-13. This coupled with its ongoing capex provides strong
visibility on its earnings going forward. We expect its
capitalisation run rate to improve during the XIIth Plan period, thus
aiding 16% earnings CAGR over FY11-17E. We reduce our
consultancy division estimates marginally to reflect a muted
growth going forward. Re-iterate ‘BUY’ with a marginally reduced
target price of Rs120/share from Rs122/share earlier.
Stagnating growth in consultancy, but telecom to remain healthy
With APDRP programme nearing completion, PGCIL’s consultancy income is expected to
stagnate going forward. In order to maintain growth for this division, the management plans
to undertake fresh assignments from other regions. It is currently providing consultancy
services in UAE, Nigeria and Bangladesh and has been participating in projects funded by
ADB, The World Bank and other organizations in various countries like Vietnam, China,
Kenya, Ethiopia, Uzbekistan, Afghanistan and Bangladesh. During FY11, PGCIL bagged 45
new assignments having project cost of ~Rs6bn. We expect the division to continue to
contribute revenues of ~Rs3bn during FY12.
The telecom division is expected to witness healthy growth as more towers are leased out, as
it benefits from a well spread transmission network. In the first phase, tower space has been
leased out in three states – J&K, Himachal Pradesh and Punjab – for installation of telecom
antennas. In addition it earns revenues from leasing its network for broadband services.
PGCIL has been awarded Rs9bn, 10 year, contract from the government to build last mile
connectivity connecting all government institutes under the National Knowledge Network
programme. We expect the division to contribute revenues of ~Rs2bn during FY12.
Deteriorating debtor days, expected to improve going forward
PGCIL experienced longer debtor days during FY11 at 141 days against 115 days in FY10. This
was due to recognising revenues as per the new tariff norms while billing as per the older
norms. This situation has worsened during the initial months in FY12 too with Delhi, Tamil
Nadu, Bihar and some North Eastern states availing the 60 days grace period for clearing
their dues. PGCIL’s FY11 annual report indicates that Delhi, Daman & Diu and some of the
North Eastern states continue to default beyond 60 days. The management expects this to
improve going forward as distribution tariffs are revised and billing happens based on the
new tariff norms. PGCIL has recently received most of the tariff orders, thus indicating
normalised debtor days in future.
Secured payment mechanism
PGCIL, along with NTPC, benefits from the tripartite agreements with RBI and the respective
state governments which secures it from the payment risk. Under this agreement, each SEB
is required to establish and maintain a letter of credit in the company’s favour with a
commercial bank. The letter of credit should cover 105% of the preceding 12 months average
monthly billing and is required to be updated twice every year.
Risks to growth
Although we believe PGCIL will be able to undertake capex of at least Rs720bn (72% of the
targeted capex) over the next plan period, our earnings estimate stand at risk owing to 1)
delays in generation capacity addition, 2) low coal supplies to fire the stations, 3) slow
environmental and right of way clearances, 4) delays in land acquisition and 5) nonallowance
to bill beneficiaries for an unutilized line. PGCIL has already been billing the
beneficiary state despite delays in commissioning the NPCIL plant. The management
proposes to implement this for NTPC’s Koldam and NHPC’s Parabati projects too, where the
transmission lines are almost ready.
Takeaways for ancillary players
The management highlighted that competition among the vendors has remained fierce. As of
date the company has over 50 vendors supplying conductors and towers and over 35 for
substation contracts. PGCIL also mentioned that competition may be compromising on
margins in the bid to bag transmission orders
Secured cash flow business makes it the best bet in turbulent times
We believe PGCIL shall be able to meet at least 72% of its targeted capex during the next plan
period. Continuing to operate under the regulatory framework, it generates safe and steady
cash flow unlike its generation peers. Moreover, PGCIL scores over its generating peers as it
is one of the few companies moving ahead to meet its capex target for the XIth plan. We
expect the company to generate operating cash flow of ~Rs66bn and Rs76bn during FY12
and FY13 respectively which will largely take care of its equity requirement for these years.
This ramp up in capex, corresponding increase in its regulated equity, higher incentive and
STOA income should translate into 17% earnings CAGR over FY11-13E. Maintain PGCIL as
our Top Pick in turbulent market conditions; re-iterate BUY with a target price of Rs120/share
– representing an upside of 26%.
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