28 March 2015

Power Grid Corp of India - Delivering growth consistently; maintain Buy: Nomura research,

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Chugging along; continuity of ‘execution impetus’ under new leadership to come into focus Action/Catalyst: Growth prospects remain upbeat; TP raised to INR174 As transmission capacity startup goes into top gear and exceeds capex in FY16 and capex-commissioning remain in tandem thereafter, we believe PWGR’s medium-term earnings outlook remains robust (FY15-17F EPS CAGR: 19%) and cash flows visibility is set to improve. We nudge our FY16F onwards EPS forecasts by 2-6% and raise our TP by 16% to INR174, implying 18% potential upside from current levels. PWGR remains our preferred stock pick amongst power utilities in India. Earnings: Expect FY15-17F EPS CAGR at 19%; reported RoE at ~16% We raise our transmission capacity startup forecasts for FY15F/16F/17F by 12%/20%/9% to INR215bn/INR243bn/INR220bn implying 96%/113%/102% of core transmission capex (cash basis) in the respective years. We continue to assume zero returns on equity investments in SPVs housing bid tariff-based transmission projects and transmission JVs with state governments. Overall, we tweak FY15F/16F EPS by -2%/+2%; expect RoE to rise to ~16% in FY17. Valuation: RI-model-based TP is INR174, implied FY17F P/B is 1.9x PWGR trades at 1.6x FY17F P/B (BVPS: INR92/sh) (3yr/5yr average of forward P/B multiples is 1.7x/1.8x); our implied FY17F P/B multiple is 1.9x. We expect the stock to continue to trade at a premium to peers on account of solid defensive growth prospects and sustainable competitive strength in the sector. The next big test: Steadfast execution focus under a new leadership Over the past 3-4 years, PWGR’s cohesive senior management, led by its Chairman (Mr Nayak), has instilled the DNA of unrelenting ‘execution focus’ in the organisation, which is reflected in the robust y-y growth in earnings. As the GOI appoints a successor to Mr Nayak, who superannuates in Sep-2015, we believe that continuity of ‘execution focus’ under the new leadership will be critical to gauge PWGR’s ability to deliver growth in the longer term.

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