Power Grid (PWGR) has a low-risk business model, earning a regulated return of 17-18% on its
core book. We expect its core book to rise by an average Rs90bn annually over the next five
years vs an average Rs45bn annually over FY08-10, which would drive earnings by a 14%
CAGR over FY11-14F. Buy.
Higher power capacity addition is a positive for PWGR
According to Central Electricity Regulatory Commission (CERC) norms, PWGR earns an ROE on
capitalised assets. The company is penalised for any delays in capitalisation due to delays in
generation capacity addition that are beyond its control. Hence, PWGR’s asset capitalisation
averaged Rs45bn annually in FY08-10, when India added only 19GW in the first three years of
the XIth Plan vs the Plan target of 62GW. But capitalisation rose to Rs73bn in FY11 as capacity
increased to 12.5GW. We forecast annual capitalisation of Rs90bn in the next five years as
capacity addition picks up based on India’s target of adding 20GW annually for the next five
years. This should help drive PWGR’s earnings by a 14% CAGR over FY11-14F. The value of
PWGR’s projects under construction has risen to about Rs800bn as of March 2011 vs about
Rs400bn as of March 2009, which clearly points to increased capitalisation in the next few years.
Earnings from consultancy and telecom to increase
About 9% of PWGR’s FY11 EBIT was from ancillary businesses such as consultancy (4.4% of
total EBIT), ULDC (3.3% of total EBIT) and telecom bandwidth leasing (1% of total EBIT). All
these require little incremental capital but help increase reported ROE. Also, PWGR has initiated
the process of leasing telecom towers from a nationwide network of 150,000 towers (it could
lease 10-15% based on company’s study) and has sought regulatory approval for determining
revenue-sharing with transmission beneficiaries.
We prefer PWGR to other Indian utilities
We prefer PWGR to other Indian utilities as: 1) it is partially insulated from coal shortage issues
faced by power generators; 2) low risk to our earnings CAGR of 14% over FY11-14F; 3) it factors
in no tax arbitrage profits (NTPC and NHPC do) and so there is no downside risk from this; and 4)
we think the stock should outperform given its earnings quality, strong momentum and
sustainable ROE. At 1.76x FY13F BV, valuations look reasonable to us. We resume coverage
with a Buy rating and Rs110 target price.
core book. We expect its core book to rise by an average Rs90bn annually over the next five
years vs an average Rs45bn annually over FY08-10, which would drive earnings by a 14%
CAGR over FY11-14F. Buy.
Higher power capacity addition is a positive for PWGR
According to Central Electricity Regulatory Commission (CERC) norms, PWGR earns an ROE on
capitalised assets. The company is penalised for any delays in capitalisation due to delays in
generation capacity addition that are beyond its control. Hence, PWGR’s asset capitalisation
averaged Rs45bn annually in FY08-10, when India added only 19GW in the first three years of
the XIth Plan vs the Plan target of 62GW. But capitalisation rose to Rs73bn in FY11 as capacity
increased to 12.5GW. We forecast annual capitalisation of Rs90bn in the next five years as
capacity addition picks up based on India’s target of adding 20GW annually for the next five
years. This should help drive PWGR’s earnings by a 14% CAGR over FY11-14F. The value of
PWGR’s projects under construction has risen to about Rs800bn as of March 2011 vs about
Rs400bn as of March 2009, which clearly points to increased capitalisation in the next few years.
Earnings from consultancy and telecom to increase
About 9% of PWGR’s FY11 EBIT was from ancillary businesses such as consultancy (4.4% of
total EBIT), ULDC (3.3% of total EBIT) and telecom bandwidth leasing (1% of total EBIT). All
these require little incremental capital but help increase reported ROE. Also, PWGR has initiated
the process of leasing telecom towers from a nationwide network of 150,000 towers (it could
lease 10-15% based on company’s study) and has sought regulatory approval for determining
revenue-sharing with transmission beneficiaries.
We prefer PWGR to other Indian utilities
We prefer PWGR to other Indian utilities as: 1) it is partially insulated from coal shortage issues
faced by power generators; 2) low risk to our earnings CAGR of 14% over FY11-14F; 3) it factors
in no tax arbitrage profits (NTPC and NHPC do) and so there is no downside risk from this; and 4)
we think the stock should outperform given its earnings quality, strong momentum and
sustainable ROE. At 1.76x FY13F BV, valuations look reasonable to us. We resume coverage
with a Buy rating and Rs110 target price.
No comments:
Post a Comment