Power Grid Corporation of India: Concerns about pace of capitalization overdone: Reiterate OW: JPMorgan

Ahead of the Dec-q results, PGCIL underperformed on concerns about weak
capitalization and slow execution of projects. In a seasonally weak quarter
owing to inclement weather conditions in Northern India, PGCIL reported
capitalization of Rs26B (up 16% YoY). The company incurred Rs150B of
capex until 12 Feb (up 46% YoY) and is well on track to achieve its FY13
target of Rs200B. Despite the healthy P&L in Dec-q, the stock has continued
to underperform. Capitalization in Mar-q until 12 Feb-2013 was Rs12B (down
37%). Based on our study of PGCIL’s T&D projects due for
commissioning in Mar-q, we estimate a sharp recovery in capitalization
(additional Rs44B in balance 4Q). Our EPS estimates imply a CAGR of
16.5% over FY12-17. PGCIL, a high-quality defensive with healthy execution
track record, provides relatively safe and stable growth with RoE of over 16%.
As on Sep-12 only Rs3.16B (less than 10 days of billing) worth of receivables
from SEBs was outstanding for over two months, a reasonably good outcome,
considering the poor health of SEBs. Being a monopoly, PGCIL enjoys
superior bargaining power with both its buyers and suppliers. We reiterate
OW on PGCIL with Mar-14 DCF-based PT of Rs135 (rolled forward from
Dec-13), which implies nearly 30% upside from the current share price.
 Healthy Dec-q P&L. PGCIL reported 3Q PAT of Rs11.3B (up 40% YoY),
exactly in line with our published estimates (see PGCIL: Ahead of Dec-q
results). We raise our EPS estimates by 3-4% for FY13-15 owing to higher
capex and capitalization assumptions. Management aims to match capex
and capitalization to restrain increase in CWIP, an aggressive objective. In
our assessment the two will converge as PGCIL delivers capex of ~Rs200B
in a row. It is notable that consensus has raised FY14 EPS estimate by 20%
since the beginning of 2011, although stock multiple has actually de-rated.
 Inside the report. See detailed substation and transmission line status of
PGCIL’s projects as of 31 Jan 2013. We have focused on projects due for
commission in the near term to ascertain physical targets and capitalization
likely to be achieved in Mar-q. Right-of-way issues and delays in land and
forest clearance affecting our estimates adversely are key downside risks to
our EPS estimates and price target.

�� -->