Power Grid Corporation of India is the country's central transmission utility and carries ~50% of the nation's generated electricity. The company has embarked upon an aggressive expansion plan over the 12th Five Year Plan (FY13-17) to augment India's power transmission and distribution infrastructure.
Power Grid over the last five years has managed to beat its guidance and is geared up to achieve its target set for 12th Plan. It recently increased its capex plans during the 12th Plan to ~INR1,100bn, higher than its earlier guidance of INR 1,000bn. The company has identified 27 transmission projects worth INR 483bn to be implemented in the near-term. With a secured business model earning 15.5% post tax return, we expect earnings to grow at CAGR of 17% over FY12-17e.
Capex and capitalisation for the 12th Plan
The company has revised its 12th Plan capex target to INR1,100bn from INR 1,000 bn earlier, of which INR 200 bn has been spent in FY13. This is due to an additional INR 100 bn on account of an increase in bidding-based projects, GoI contracts, green energy corridors, intra-state projects, and transnational interconnections. Yearly capex has been revised to INR221.5bn/224.5bn/225bn/225.5bn in FY14e/15e/16e/17e, respectively, as against an earlier INR200bn each year. To fund the increased capex, the company has successfully raised INR54bn, which will be deployed over the next two years.
Regulated business model with assured returns
Power Grid continues to earn a regulated RoE of 15.5% and incentives of 1.5% due to higher availability and income from consultancy and other segments. A regulatory order by the Central Energy Regulatory Commission in Nov-13 disallowed income from short-term open access, which lowered regulated RoE to 17.5% from 19%, impacting profitability by INR2bn. Book RoE for the company will increase to 14% in FY16 from 13% in FY14 due to a flat yearly capex of INR200bn and higher capitalisation in the years to come.
No further dilution required to fund capex for next five years
Power Grid has successfully concluded the follow-on public offer of 787m equity shares of INR10 each, comprising 17% of the existing paid-up capital, which comprises of: (a) Fresh issue of 601.8m shares (13% of existing paid-up capital); (b) Disinvestment of 185.2m equity shares (4% of existing paid-up capital). Post issue, the company is well capitalised to fund its capex requirements over the next five years and will not require to raise further equity.
Grid strengthening to help improve power sector volumes
Due to the grid collapse in Jul-12, thrust on grid security and strengthening schemes have taken precedence. Of the capex planned, INR180bn is for grid strengthening and INR90bn for ultra mega power projects. This will help in providing long- and medium-term open access to the consumers.
Valuations
At the current market price of INR99 per share, the stock trades at a FY15e P/E of 9.6x and P/B of 1.3x. We reiterate our Buy recommendation with a target price of NR124/share, (target P/BV multiple of 1.7x FY15e).
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