PGCIL, a classic low beta (~0.66) defensive utility has outperformed the Sensex
by ~10% over the last year but absolute stock returns have been down 10%. Over
the last month, PGCIL has underperformed the Sensex by ~6%.
Underperformance is attributable to two things in our view: (A) Statistical
reason: PGCIL, a bond proxy, has a high negative correlation to bond yields.
The stock has delivered negative returns in a rising interest rate environment;
(B) Fundamental reason: In the past six months, PGCIL has added ~Rs23bn to
gross block, FY12 target is ~Rs95-100bn. Clearly, commissioning of
transmission networks has seen delays.
We see an opportunity to buy at current levels: (A) The interest rate cycle is
approaching peak levels, rate-cuts likely in FY13E, (B) CoD schedule of
transmission capex by PGCIL in FY12 is fairly back-ended as per CEA data;
capitalization may see a pick-up in 2H; (C) Valuations at a trough. 14.7x
FY12E EPS is well below historical average (~17.7x since Jan-09); (D) our
channel checks indicate that EPC contractors are positive about improvement in
pace of execution after Mr. R.N. Nayak (ex-Director Operations) assumed
charge as CMD starting Sep-2011.
Annual report analysis. FY11E D/E was 1.91x, after incorporating 12th Plan
capex of ~Rs840bn (~20% discount to target), our D/E estimate remains below
70:30, implying dilution is avoidable in the medium term. A red flag on
payment delays (beyond 60 days allowed) in a few pockets viz. Delhi, Daman
& Diu, and certain north eastern states. Detailed annual report takeaways, a
close look at PGCIL’s revenue and DCF model are inside the report.
Our Mar-12 DCF-based PT of Rs116, implies ~20% upside potential. We
reiterate our OW view on the stock. We think PGCIL offers relatively
safe/stable growth as compared to IPPs, which face significantly higher
uncertainty around land, fuel, environmental clearances and merchant prices.
Downside risks: slippage in capex and capitalization assumed in our base case
(see sensitivity analysis on page 2 in the report).
by ~10% over the last year but absolute stock returns have been down 10%. Over
the last month, PGCIL has underperformed the Sensex by ~6%.
Underperformance is attributable to two things in our view: (A) Statistical
reason: PGCIL, a bond proxy, has a high negative correlation to bond yields.
The stock has delivered negative returns in a rising interest rate environment;
(B) Fundamental reason: In the past six months, PGCIL has added ~Rs23bn to
gross block, FY12 target is ~Rs95-100bn. Clearly, commissioning of
transmission networks has seen delays.
We see an opportunity to buy at current levels: (A) The interest rate cycle is
approaching peak levels, rate-cuts likely in FY13E, (B) CoD schedule of
transmission capex by PGCIL in FY12 is fairly back-ended as per CEA data;
capitalization may see a pick-up in 2H; (C) Valuations at a trough. 14.7x
FY12E EPS is well below historical average (~17.7x since Jan-09); (D) our
channel checks indicate that EPC contractors are positive about improvement in
pace of execution after Mr. R.N. Nayak (ex-Director Operations) assumed
charge as CMD starting Sep-2011.
Annual report analysis. FY11E D/E was 1.91x, after incorporating 12th Plan
capex of ~Rs840bn (~20% discount to target), our D/E estimate remains below
70:30, implying dilution is avoidable in the medium term. A red flag on
payment delays (beyond 60 days allowed) in a few pockets viz. Delhi, Daman
& Diu, and certain north eastern states. Detailed annual report takeaways, a
close look at PGCIL’s revenue and DCF model are inside the report.
Our Mar-12 DCF-based PT of Rs116, implies ~20% upside potential. We
reiterate our OW view on the stock. We think PGCIL offers relatively
safe/stable growth as compared to IPPs, which face significantly higher
uncertainty around land, fuel, environmental clearances and merchant prices.
Downside risks: slippage in capex and capitalization assumed in our base case
(see sensitivity analysis on page 2 in the report).
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