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http://content.icicidirect.com/mailimages/ICICIdirect_PowerGrid_InitiatingCoverage.pdf
M o n o p o l y f r a n c h i s e . . . .
Power Grid (PGCIL) is a play on the monopolistic transmission sector in
India with a low risk business model. Higher capex in the XII
th
Five Year
Plan of |1,00,000 crore vs. |55,000 crore in XI
th
Plan) will drive earnings
growth at 14% CAGR in FY12E-14E (over 22% for FY08-11) for the
company. The company earns a core RoE (adjusted for CWIP) in excess
of 25%. The regulated assets for the company are expected to grow at
20% in FY11-14E. Besides these, the company earns revenues through
consultancy (3-4% of revenues), short-term open access and telecom
business. Unlike other power utilities, the company is immune to fuel risk
because it earns a fixed rate of return and income accretion starts once
the transmission line is commissioned. As a result, the stock has
outperformed the broader indices by 17% YoY for the last one year.
Majority of the capex (55%) in the XII
th
Five Year Plan is based on
generation. However, leasing telecom towers can to a certain extent
cushion this and improve RoEs. Moreover, the dilutive nature of the
business (equity dilution every three to four years if the company
maintains capex guidance) would lead to stable RoEs (devoid of expected
improvement). Await a better entry opportunity to buy this monopoly
franchise. Key risk to our call is higher capitalisation and leasing of
telecom towers that would improve PAT growth.
Robust execution track record to continue going into XII
th
Plan…
Among regulated utilities, PCGIL exhibits a robust track record of meeting
its MoU targets. Out of the |55,000 crore capex for the XI
th
Five Year Plan,
PGCIL (as of February 2012) has achieved a capex of |48,000 crore. Even
if we assume that no further capex happens for the remainder of FY12E,
the achievement rate will be at 89%. For the XII
th
Plan, we have built in
achievement rate of 85% over FY13E-17E (|85,000 crore of capex).
Higher capitalisation rate to drive revenue growth at 16% CAGR over FY11-14E
PGCIL’s 9MFY12 capitalisation stood at |6,464 crore. We estimate the
same at |9,700 crore (FY12E) vs. street estimates of |8,400 crore.
However, the company has guided for |10,000 crore and |14,000 crore in
FY12 and FY13, respectively. Hence, higher capitalisation would drive
revenue and PAT CAGR of 15% and 14% over FY12E-14E, respectively.
V a l u a t i o n s
We believe PGCIL offers a favourable risk-reward ratio among utilities
given limited volatility attached to its earnings (earnings CAGR of 14% for
FY12E-14E). We have valued the stock on a cash flow basis to arrive at a
fair value of |118/share. Downsides, if any, should be used to accumulate
this monopoly franchise. Initiate at Hold.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
http://content.icicidirect.com/mailimages/ICICIdirect_PowerGrid_InitiatingCoverage.pdf
M o n o p o l y f r a n c h i s e . . . .
Power Grid (PGCIL) is a play on the monopolistic transmission sector in
India with a low risk business model. Higher capex in the XII
th
Five Year
Plan of |1,00,000 crore vs. |55,000 crore in XI
th
Plan) will drive earnings
growth at 14% CAGR in FY12E-14E (over 22% for FY08-11) for the
company. The company earns a core RoE (adjusted for CWIP) in excess
of 25%. The regulated assets for the company are expected to grow at
20% in FY11-14E. Besides these, the company earns revenues through
consultancy (3-4% of revenues), short-term open access and telecom
business. Unlike other power utilities, the company is immune to fuel risk
because it earns a fixed rate of return and income accretion starts once
the transmission line is commissioned. As a result, the stock has
outperformed the broader indices by 17% YoY for the last one year.
Majority of the capex (55%) in the XII
th
Five Year Plan is based on
generation. However, leasing telecom towers can to a certain extent
cushion this and improve RoEs. Moreover, the dilutive nature of the
business (equity dilution every three to four years if the company
maintains capex guidance) would lead to stable RoEs (devoid of expected
improvement). Await a better entry opportunity to buy this monopoly
franchise. Key risk to our call is higher capitalisation and leasing of
telecom towers that would improve PAT growth.
Robust execution track record to continue going into XII
th
Plan…
Among regulated utilities, PCGIL exhibits a robust track record of meeting
its MoU targets. Out of the |55,000 crore capex for the XI
th
Five Year Plan,
PGCIL (as of February 2012) has achieved a capex of |48,000 crore. Even
if we assume that no further capex happens for the remainder of FY12E,
the achievement rate will be at 89%. For the XII
th
Plan, we have built in
achievement rate of 85% over FY13E-17E (|85,000 crore of capex).
Higher capitalisation rate to drive revenue growth at 16% CAGR over FY11-14E
PGCIL’s 9MFY12 capitalisation stood at |6,464 crore. We estimate the
same at |9,700 crore (FY12E) vs. street estimates of |8,400 crore.
However, the company has guided for |10,000 crore and |14,000 crore in
FY12 and FY13, respectively. Hence, higher capitalisation would drive
revenue and PAT CAGR of 15% and 14% over FY12E-14E, respectively.
V a l u a t i o n s
We believe PGCIL offers a favourable risk-reward ratio among utilities
given limited volatility attached to its earnings (earnings CAGR of 14% for
FY12E-14E). We have valued the stock on a cash flow basis to arrive at a
fair value of |118/share. Downsides, if any, should be used to accumulate
this monopoly franchise. Initiate at Hold.
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