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Power Grid Corpn. (PGCIL) - Co. Update - Dtd. - Dec. 27, 2012




Axis Capital Limited


27 Dec 2012





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We interacted with PGCIL management to get an update on execution. While the Street may be negatively surprised on Q3 execution, long-term targets remain intact. PGCIL may revise its 12th plan capex target of Rs 1 tn upwards and hence would need fresh equity infusion. Additionally, de-emphasizing Short Term Open Access (STOA) income (contributed 150 bps to core RoE) is likely to be negative. We maintain our earnings estimates. However, we revise our SoTP-based TP downwards to Rs 131 (vs. Rs 141) as we factor in lower core sustainable RoE of 16.5% (vs. 17.5%) due to lower contribution from STOA going forward. Maintain BUY with 14% upside from CMP of Rs 115. The stock trades at 13x FY13E EPS of Rs 8.6 and 11x FY14E EPS of Rs 10.5 and 2x FY13E BVPS of Rs 56 and 1.8x FY14E BVPS of Rs 63. Key takeaways:  Capitalization in Q3 likely to be weak at Rs 25-30 bn (H1FY13 at Rs 68 bn) due to prolonged monsoons. However, management guided for increased pace of commissioning in Q4FY13 and expects FY13 at Rs 160-180 bn (Rs 141 bn in FY12). We have factored in capitalization of ~Rs 160 bn in FY13 and FY14 each and hence no change in our estimates.  Equity dilution likely; current 12th plan capex target of Rs 1 tn may be revised upwards. According to the management, PGCIL is adequately funded for its 12th plan target at execution pace of Rs 160-180 bn pa. However, it expects an upward revision in 12th plan capex target driven by: (a) Green Energy Corridors with an opportunity size of ~Rs 430 bn (may be allocated to PGCIL or through PPP), (b) JVs with state transcos (opportunity size ~Rs 550 bn), (c) PPP (opportunity size ~Rs 250 bn).  Contribution from STOA would get marginalized: Post the failure of northern grid, PGCIL has been de-emphasizing on sale of power through STOA. Income from STOA contributed ~150 bps to PGCIL’s FY12 core RoE of 17.5%. Management expects income from STOA to remain at Rs 300 bn p.a. vs. FY12 levels of Rs 325 bn. Regards, Bhavin Vithlani (Executive Director – Power & Cap Goods) Institutional Equity Research Axis Capital Limited Tel.: + 91 22 4325 1144 Ajay Nandal (AVP – Power) Institutional Equity Research Axis Capital Limited Tel.: + 91 22 4325 1120

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