Power Grid �� Capex and capacity addition going strong, ::HSBC Research

Power Grid
�� Capex and capacity addition going strong, 2Q net profit expected
to grow 15% y-o-y
�� Best placed in the sector with limited operational risks unlike peers;
earnings outlook is strong on the back of capacity expansion
�� Reiterate Overweight rating with a target price of INR130


2Q preview – expect good numbers
We expect Power Grid to report net profit of
INR7.5bn (up 15% y-o-y) on the back of
increased capacity addition (INR75bn in FY11)
and additional income from the JV amounting to
INR410m relating to 1QFY12.
We expect the firm to incur capex of INR35-40bn
in 2QFY12 (INR135bn for FY12e), and capacity
additions of INR20bn (INR100bn in FY12).
Strong outlook, limited operational
risks unlike its peers
Regulated equity base is expected to more than
double over next three years from INR129bn in
FY11 to INR273bn in FY15. It has cINR265bn of
capital work in progress (largely capex from
FY10-FY11) to be translated into assets over the
next two to three years, providing more visibility
in the growth in the regulated equity base. This
drives our expectation that net profit will grow at
a 15.5% CAGR over FY12-14 from a high base of
FY11. We do not see any significant downside
risks to these earnings estimates, given the
assured return model (15.5% post-tax ROE) once
the asset is operational.
Operational risks are limited compared to a
power plant. There is no fuel cost risk, with its
major costs being those for employees and
maintenance, which are largely fixed in nature
and not volatile.
Investor focus on capex and capacity
addition
PGCIL is expected to complete its eleventh fiveyear
plan ending FY12 with total capex of
INR520bn (versus a target of INR550bn). This
represents a significant c177% increase over the
last plan period.
We do not expect any slowdown in capex post the
plan period (contrary to market fears). We
forecast PGCIL will incur capex of INR276bn and

capacity addition of INR240bn in FY13-14
similar to FY12. This would be driven by about
INR430bn of projects under construction and
INR580bn worth of ordering for high capacity
power transmission corridors (HCPTC) projects
expected to start in 2HFY12.
Still, we remain conservative, factoring capex of
INR800bn for the twelfth plan period (FY13-17)
against the company’s guidance of INR1,100-
1,200bn.
Reiterate Overweight rating with a TP
of INR130We use DCF to value Power Grid and apply a cost
of equity of 10.3% and terminal growth rate of
3% to derive our target price of INR130 per share.
Our target price of INR130 implies a potential
return of 32.9% (including dividend yield), which
is above the Neutral band for non-volatile Indian
stocks of 6-16%; thus, we have an Overweight
rating on the stock.
Our target price implies an FY13e PB of 2.3x versus
the current FY12e PB of 2.0x, and an FY13e PE of
17.2x versus the current FY12e PE of 15.1x.
Risks
Key downside risks include longer-than-expected
delays in commissioning of projects. Other risks
include a potential default by SEB and a reduction
in regulated returns, although both look highly
improbable in the immediate future.