BHAVIKK SHAH's BLOG: POWER GRID

Scrip Code: 532898 / POWERGRID

CMP: Rs. 119.55; Buy at Rs. 115-119 levels.

Short Term Target Rs. 126; Medium to Longer term Target: Rs. 160; STOP LOSS – Rs. 109.98; Market Cap: Rs. 55,348.36 Cr; 52 Week High/Low: Rs. 121.55 / Rs. 93.50.

Total Shares: 462,97,25,353 shares; Promoters : 321,40,24,212 shares –69.42 %; Total Public holding : 141,57,01,141 shares – 30.57 %; Book Value: Rs. 52.84; Face Value: Rs. 10.00; EPS: Rs. 7.39; Div: 17.50 % ; P/E: 16.20 times; Ind. P/E: 16.01; EV/EBITDA: 9.83

Total Debt: 40,882.77 Cr; Enterprise Value: Rs. 90,240 Cr.

POWER GRID CORPORATION OF INDIA LTD: The Company was incorporated in 1989 and is based in Gurgoan, India. The Company was formerly known as National Power Transmission Corporation Limited and changed its name to Power Grid Corporation of India Ltd in Oct 1992. Power Grid Corporation of India Ltd. is a central transmission utility, engaged in the transmission of power in India. The company involves in planning, coordinating, supervising, and controlling inter-state transmission systems; and operating unified load dispatch centers and regional load dispatch centers. It operates approximately 87,111 circuit kms of transmission lines, as well as 139 sub-stations with transformation capacity of approximately 96,355 MVA. The company also provides consultancy services for the construction of transmission lines and sub-transmission lines, load dispatch centers, telecom networks, and distribution and rural electrification in India, Afghanistan, Bangladesh, Bhutan, Dubai, Nepal, Nigeria, and Srilanka. In addition to this it owns and operates broadband telecom network of approximately 25,000 kms connecting approximately 110 cities in India that offers E1/E3/DS3/STM1/STM4/STM16 leased line, Ethernet private leased line, and multi-site LAN Interconnect and Internet access services to telecoms, MNCs, BPOs, government, corporate, and media clients. Power Grid Corporation of India Limited operates in the Electric services sector. On March 29, 2012, Power Finance Corporation Limited announced that PFC Consulting Limited transferred its wholly owned subsidiary, Nagapattinam-Madhugiri Transmission Company Limited, to the Company. Power Grid came up with an IPO in the year 2007 at Rs. 52/share followed by an FPO in 2010 at Rs. 90/share. The company is compared locally with Torrent Power Ltd, Reliance Infrastructure Limited and CESC Limited.

Investment Rationale:

Power Grid Corporation Of India Ltd is a Central PSU. The management continued to report strong numbers on capitalization and is confident of achieving its implied guidance for capitalization for FY13 which is around Rs. 20,000 Cr. The management also tried to soothe investor’s nerves on dilution by assuring that it can avoid dilution by tweaking Debt Equity ratio requirement for 1‐2 years in its conference call. The company has further capitalised assets worth of Rs. 1,000 Cr in July till date taking the total capitalization of the company to Rs. 5,000 Cr. Power Grid reported sales growth of 31.1 % YoY at Rs. 2,880 Cr. Its Transmission business contributed to Rs. 2,770 Cr up by 36% YoY, the consultancy business contributed to Rs. 60.4 Cr up by 8% YoY and the Telecom business contributed to Rs. 54.3 Cr up by 19% YoY. Power Grids EBITDA margins stood at 85.3% up by 1.50% YoY. Company’s margins mainly improved on account of 1.90% YoY decrease in employee cost as % of sales. Power Grids’s Adj. PAT stood at Rs. 900 Cr up 29 % YoY. There was an increase in interest expense by 45.6 % YoY of about Rs. 610 Cr and decrease in other income by 35.7 % YoY of Rs. 920 Cr, leading to lower-than-expected PAT. But management has guided for no further equity dilution even in FY14/15E, this will reduce equity component of capex from 30 % to 28-29 % to avoid dilution. Accordingly, the debt funding requirement would be around 72 % in FY13/14E to avoid dilution. Company’s adj. core ROE is of 20 % which includes open access and consultancy and does not have any downside risk. Huge capitalization will drive the regulated equity growth of about 34 % in FY13E. Considering PGCIL’s core ROE is not likely to contract, risk to earnings arises only from lower capitalization. However, expert’s don’t see significant risk to earnings given that they have capitalization assumption of about 10 % - 15 % lower than management guidance.

Lessons Learnt : There are 5 power grids (Northern, Eastern, North Eastern, Southern & Western - all of them are inter-connected except Southern Grid) which manages the power supplies in the country. And the states that do fall under a power grid draws their power needs from it. As a result of scarcity of power, these states that come under various grids are allocated with quotas of power they draw from the grid. The states are supposed to stick to the quotas allocated for them - this is called as "Grid Discipline", but in the first week of August 2012 some northern states (Northern Grid covers 9 regions - Punjab, Haryana, Rajasthan, Delhi, Uttar Pradesh, Uttarakhand, Himachal Pradesh, J&K & Chandigarh) began to overdraw on the limit allowed to them and as a result the whole grid collapsed under pressure effecting into 2 massive grid failures that snapped power supply in over 19 states of India bringing lives of more than 60 Cr people to stand still and partially making Indian economy to grinding halt- Taking the lesson from this the Power Grid board have taken some steps they have approved some investments - Expansion and Replacement of Existing SCADA/EMS system at SLDC of North Region NR ULDC Phase II at an estimate cost of Rs. 70.90 Cr with commissioning schedule of 27 months from the date of approval and Secondly the board approved Installation of Reactors in western region at an estimate cost of Rs. 83.17 cr with commissioning schedule of 24 months from the date of investment approval.

Outlook and Valuation:

Management has guided for no further equity dilution even till FY14E-FY15E. Power Grid Corporation of India Ltd will reduce equity component in capex from 30 % to 28 -29 % to avoid dilution. So, the company would be required to have a debt funding of around 72 % to avoid dilution in FY13- FY14E. It has also retained its XII plan capex guidance at Rs. 1 lakh Cr out of which, investment approval for Rs. 84000 Cr has been secured and orders worth Rs. 70,000 Cr have already been placed. Power Grids’ EPS grew due to lower other income, higher deferred tax and especially no equity dilution. Despite the positive view on PGCIL, stock’s performance has been absolutely remained lackluster. This has been largely due to dilution and revenue recovery of IPP related capex which was 50% of 12th plan capex. Equity dilution overhang should no longer be there however ambiguity on the second one still remains. At the current market price of Rs. 119.55, the stock is trading at 13.43 x FY13E. Earnings per share (EPS) of the company for FY13E could be seen at Rs. 8.90 and Rs. 9.30 for FY14E. It is expected that the stock could deliver earnings CAGR of 16.2 % over FY12 - FY17E, with core ROE of about 17.6 % over the same period. Even though the valuations are at 1.6 x FY14E, it trades 15 % premium to NTPC, one can retain PGCIL on its better earnings growth of about 19 % in FY12- FY15E vs. 7 % in NTPC with a target price of Power Grid of Rs. 160.00 for Medium to Long term investment and for the SHORT TERM PLAYERS it should be Rs. 130.00

KEY FINANCIALS	FY11	FY12	FY13E	FY14E
SALES (Rs. Crs)	8,388.70	10,035.30	13,081.00	15,457.40
NET PROFIT (Rs. Crs)	2,700.90	3,254.90	3,926.20	4,868.00
EPS (Rs.)	5.80	7.00	8.50	9.60
PE (x)	19.00	15.80	13.10	11.60
P/BV (x)	2.20	2.00	1.80	1.50
EV/EBITDA (x)	12.50	12.10	9.90	9.00
ROE (%)	12.80	13.00	14.40	14.90
ROCE (%)	6.60	6.40	6.90	7.00

I would buy POWER GRID CORPORATION OF INDIA LTD with a price target of Rs. 125 for the short term and Rs. 160 for the 6 month target. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 108.00 on every purchase.

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