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http://www.icicidirect.com/mailimages/ICICIdirect_PowerGrid_ManagementMeetUpdate.pdf
S t a b l e b u s i n e s s . . .
We met V.C. Jagannathan (ED - Finance) of PowerGrid to get an
insight into the business model and understand its future growth strategy.
The company is a monopoly in transmission in India. Currently, the
company owns a transmission network of 82,355 circuit km (ckt) of interstate transmission lines and 135 EHV and HVDC substations with
transformer capacity of 93,050 MVA. It wheels ~ 50% of power
generated in the country. The revenue model is asset based (higher
capitalisation leads to higher revenues) and earns a core RoE of 15.5%
per annum on regulated assets (RoNW ranges between 12-13%). Besides
these, the company earns revenues through consultancy (3.5% of overall
FY11 revenues). As per CERC regulations, the debt: equity ratio is 70:30.
The nature of the company’s business model is equity dilutive (equity
dilution every four years depending on capitalisation). System availability
for the company in FY11 was 99.8%.
ƒ Capex driven regulated business model sans fuel risk; higher debtor
days a risk
The company earns revenue by capitalising assets earning core RoE
of 15.5% (CERC determined) on regulated assets. The company’s
debtor days have gone up from 113 days in FY10 to 141 days in
FY11 (on deteriorating financials of SEBs). In May, CERC issued an
order wherein PGCIL can recover provisional tariff up to 95% of
fixed costs. This can reduce debtor days in the coming years
(barring defaults by SEBs).
ƒ Other business to drive future profit growth
Beside transmission, the company earns revenues from
consultancy, short-term open access and telecom. Higher merchant
power capacities coming on stream in FY12 and FY13 can increase
revenues from this segment. The company plans to lease ~10,000
towers to telecom companies (thereby earning rental income of |
3500 per month).
ƒ Generation delay may delay capitalisation besides manpower shortage
In the XIIth Five Year Plan (2012-2017), the company plans to do
capex of | 1, 05,000 crore (best case); | 80,000 crore (worse case). A
delay in generation could delay capitalisation. Manpower shortage
among EPC contractors is a key issue affecting capitalisation.
V a l u a t i o n s & O u t l o o k
At the CMP of | 96, the stock is a trading at P/BV of 2.1x FY11. We believe
improving capitalisation rate, foray into overseas consultancy (domestic
consultancy RGGVY has topped out) and leasing of towers to telecom
companies (10% of 1 lakh) are key catalysts to re-rate the stock. We are
positive on the prospects of the company but currently do not have a
rating on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
http://www.icicidirect.com/mailimages/ICICIdirect_PowerGrid_ManagementMeetUpdate.pdf
S t a b l e b u s i n e s s . . .
We met V.C. Jagannathan (ED - Finance) of PowerGrid to get an
insight into the business model and understand its future growth strategy.
The company is a monopoly in transmission in India. Currently, the
company owns a transmission network of 82,355 circuit km (ckt) of interstate transmission lines and 135 EHV and HVDC substations with
transformer capacity of 93,050 MVA. It wheels ~ 50% of power
generated in the country. The revenue model is asset based (higher
capitalisation leads to higher revenues) and earns a core RoE of 15.5%
per annum on regulated assets (RoNW ranges between 12-13%). Besides
these, the company earns revenues through consultancy (3.5% of overall
FY11 revenues). As per CERC regulations, the debt: equity ratio is 70:30.
The nature of the company’s business model is equity dilutive (equity
dilution every four years depending on capitalisation). System availability
for the company in FY11 was 99.8%.
ƒ Capex driven regulated business model sans fuel risk; higher debtor
days a risk
The company earns revenue by capitalising assets earning core RoE
of 15.5% (CERC determined) on regulated assets. The company’s
debtor days have gone up from 113 days in FY10 to 141 days in
FY11 (on deteriorating financials of SEBs). In May, CERC issued an
order wherein PGCIL can recover provisional tariff up to 95% of
fixed costs. This can reduce debtor days in the coming years
(barring defaults by SEBs).
ƒ Other business to drive future profit growth
Beside transmission, the company earns revenues from
consultancy, short-term open access and telecom. Higher merchant
power capacities coming on stream in FY12 and FY13 can increase
revenues from this segment. The company plans to lease ~10,000
towers to telecom companies (thereby earning rental income of |
3500 per month).
ƒ Generation delay may delay capitalisation besides manpower shortage
In the XIIth Five Year Plan (2012-2017), the company plans to do
capex of | 1, 05,000 crore (best case); | 80,000 crore (worse case). A
delay in generation could delay capitalisation. Manpower shortage
among EPC contractors is a key issue affecting capitalisation.
V a l u a t i o n s & O u t l o o k
At the CMP of | 96, the stock is a trading at P/BV of 2.1x FY11. We believe
improving capitalisation rate, foray into overseas consultancy (domestic
consultancy RGGVY has topped out) and leasing of towers to telecom
companies (10% of 1 lakh) are key catalysts to re-rate the stock. We are
positive on the prospects of the company but currently do not have a
rating on the stock.
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