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Power Grid Corporation of India Ltd

(PGCIL) (PGCIL)
BUY
Analyst
Rajiv Bharati
rajiv.bharati@destimoney.com
25 September 2014
Power Grid - BUY with target upside of 24%
Key Data
Risk Category LOW
NSE Code POWERGRID
BSE Code 532898
Sector Power
Industry Transmission / Distribution
Face value (` per share) 10
Book value (` per share) 66.3
Dividend yield 1.9%
52 Wk.(H/L)(`) 92 / 147
Market Cap. (` mn) 711,496
BUY
TARGET : ` `` `1 11 16 66 68 88 8
CMP : ` `` `1 11 13 33 36 66 6
(In ` mn) (In ` mn) (In ` mn) (In ` mn) FY13 FY14 FY15E FY16E
Net Sales 131,639 156,754 179,886 212,992
EBITDA 112,139 132,639 153,060 182,752
EBITDA Margin 85.2% 84.6% 85.1% 85.8%
EPS (`) 9.3 9.5 10.1 11.9
EV/Sales 11.55 9.7 8.5 7.1
EV/EBITDA 13.6 11.5 9.9 8.3
P/E(x) 14.6 14.4 13.4 11.4
Price Performance CY11 CY12 CY13 YTD
Absolute 1.8% 14.6% -12.9% 36.1%
Relative 26.4% -13.1% -19.7% 10.6%
2
Shareholding Pattern Relative Stock Performance (Sep13=100)
Jun-14 Mar-14 Dec-13 Sep-13
Promoter 57.9% 57.9% 57.9% 69.4%
FII 26.9% 26.2% 25.4% 16.9%
DII 8.2% 8.5% 8.6% 6.8%
Bodies Corporate 2.6% 2.7% 2.7% 2.6%
Others 4.5% 4.8% 5.4% 4.3%
Total 100% 100% 100% 100%
Source: Company, Destimoney Research, Bloomberg
80
100
120
140
160
Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14
Power Grid NIFTY
Higher commissioning and lower tax outgo as per CERC norms to drive earnings
PGCIL reported a 10.7% YoY rise in net sales to `39.4 billion for Q1FY15 led by increased capitalization during the quarter,
although consultancy and telecom segment remained subdued. Transmission income grew 12.3% YoY to `38.6 billion and
Telecom segment witnessed a 10.9%annual growth to `582.3 million. However, Consultancy revenues were down 10.4%YoY
during Q3FY13.
In FY15, PGCIL would witness uptick in commissioning due to recent resolution of stalled projects. It has operationalized two
projects with right-of-way issues namely, JharsugudaDharamjaygarh worth ~`3.4bn and AnnupurJabalpur. Additionally, the
right-of-way issue at the Angul-Jharsuguda 765kV transmission line worth ~`8.3bn has been resolved.
During June14 quarter, assets worth `48.8 billion was commissioned, a jump of 82% YoY. The trend in asset capitalization
bodes well and we expect the commissioning in FY15 would be well above `220 bn. Higher asset capitalization will continue to
enhance regulated equity of PGCIL, keeping its core profitability intact. The company has incurred a capex of about `58.4 billion
3
in Q1FY15 quarter, up 15%YoY.
Lower tax outgo at 20.14% rate during the quarter is on account of CERC guidelines which allow deferred tax relating to
transmission business as recoverable from beneficiary to be recovered upon realization in the future.
PGCIL is well placed to deliver ~17% earnings CAGR between FY14-16 with no equity dilution requirement in near future and
minimal impact of CERC norms coupled with a tight commissioning schedule ahead.
PGCILs growth is pivoted on its asset capitalization capability, as the company earns regulated RoE of 15.5% on the equity
invested in transmission assets. We take comfort from the recent uptick in commissioning and resolution of stuck projects. We
recommend BUY on PGCIL with a target price of `168 per share.
Lower income in consulting and telecom segment impacted the topline...
Performance Summary
Particulars (` Particulars (` Particulars (` Particulars (` mn mn mn mn) )) ) Q1FY15 Q1FY14
%
Change
Q4FY14
%
Change
Revenue 39,419 35,600 10.7% 39,863 -1.1%
Total Expenditure 5,690 4,948 15.0% 6,032 -5.7%
Operating Profit 33,729 30,652 10.0% 33,831 -0.3%
Other Income 1,333 741 1,974 -32.5%
EBITDA 35,061 31,393 11.7% 35,805 -2.1%
Depreciation 11,550 9,644 19.8% 10,750 7.4%
EBIT 23,511 21,749 8.1% 25,054 -6.2%
Interest 9,279 7,599 22.1% 8,189 13.3%
EBT 14,232 14,150 0.6% 16,865 -15.6%
Tax 2,866 3,747 5,107
Transmission
97%
Consultancy
1%
Telecom
2%
Revenue Breakup (Q1FY15)
4
Source: Company
PAT 11,365 10,403 9.2% 11,758 -3.3%
Margins(%)
OPM 85.6% 86.1% 84.9%
NPM 28.8% 29.2% 29.5%
During Q1FY15, the company witnessed 10.7% YoY rise in its total revenues, aided by execution pick up in the transmission
segment. The results for the quarter were affected by the lower consulting income, lower income from telecom division and
one time energy charges paid to Bihar government.
PGCIL reported Q1FY15 PAT at `11.4 billion, up 9.2%YoY. However, on a sequential basis, net profit fell by 3.3%gain.
while transmission segment continuing to drive growth
Transmission Segment Performance
53%
56%
60%
63%
67%
0
12,000
24,000
36,000
48,000
Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q3FY14 Q1FY15
`
m
i
l
l
i
o
n
Revenue including other income (LHS) PBIT (LHS) PBIT Margin (RHS)
5
Source: Company
Transmission revenues increased12.3% on YoY basis to stand at `38.6 billion for the quarter under review. The segment
witnessed a 247 basis points YoY decline in PBIT margins to 57.85%during Q1FY15.
On a QoQ basis, transmission revenue remained muted with 1.4% growth. Management indicated that it was largely due to
tightened operation norms and stiffer incentive thresholds set in 2014-19 tariff regulations.
Rated as one of the best transmission companies in terms of system availability, PGCIL continues to maintain high operational
efficiencies. PGCIL reported a system availability of 99.92%in FY14, with reliability of 0.56 trippings / line.
Led by strong project execution
Transmission Lines
94,500
99,000
103,500
108,000
112,500
Till Q1FY14 Till Q1FY15
G
W
-
c
k
m
X-formation Capacity
0
60,000
120,000
180,000
240,000
Till Q1FY14 Till Q1FY15
M
V
A
6
Source: Company
Addition in FY15 till 5-Aug-14: 5,347 GW-ckm Addition in FY15 till 5-Aug-14: 7,581 MVA
During the quarter, the company added 2,180 circuit kilometers of transmission lines, with the total lines under
management reaching to 109,536 circuit kilometers until July 2014.
It has targeted of commissioning about 10,000 circuit kilometers and about 15 sub-stations, as well as inter regional
capacity of 7300 MW.
Consulting and Telecom segments remained subdued in Q1FY15 although
execution pipeline remained healthy
0%
20%
40%
60%
80%
0
600
1,200
1,800
2,400
Q
2
F
Y
1
3
Q
3
F
Y
1
3
Q
4
F
Y
1
3
Q
1
F
Y
1
4
Q
2
F
Y
1
4
Q
3
F
Y
1
4
Q
3
F
Y
1
4
Q
1
F
Y
1
5
`
m
i
l
l
i
o
n
Revenue including other income (LHS)
PBIT (LHS)
PBIT Margin (RHS)
Consultancy Segment Performance Telecom Segment Performance
0%
12%
24%
36%
48%
0
220
440
660
880
Q
2
F
Y
1
3
Q
3
F
Y
1
3
Q
4
F
Y
1
3
Q
1
F
Y
1
4
Q
2
F
Y
1
4
Q
3
F
Y
1
4
Q
3
F
Y
1
4
Q
1
F
Y
1
5
`
m
i
l
l
i
o
n
Revenue including other income (LHS) PBIT (LHS) PBIT Margin (RHS)
7
Source: Company
Consultancy revenues dropped 36.4% YoY in Q1FY15. However, the segment added one new client internationally and 9 new
domestic assignments during Q1FY15. The company has over 135 assignments under execution which signifies a healthy
pipeline.
Telecom segment witnessed a 10.4%YoY dip in revenues to `675 million in Q1FY15. Higher depreciation charges and one time
payment linked provision ~`180 mn impacted the performance of the telecom segment. During Q1FY15, PGCIL added 10 new
clients in the telecom segment. Additionally, the company entered into an agreement with BSNL to setup 800 Gbps across 20
locations in north east and Sikkim. Also, it has received an order to lease 60 Gbps on IRU basis to an IT giant.
The pace of capitalization during the past two quarters has picked up
Capex vs. Commissioning
0
40,000
80,000
120,000
Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15
`
m
i
l
l
i
o
n
Capex Commisioning
8
Source: Company
PGCIL has witnessed uptick in asset commissioning during the past two quarters. We expect the full year
capitalization to be well over `220 bn. Higher asset capitalization will continue to enhance regulated equity of
PGCIL, keeping its core profitability intact.
PGCIL's capitalized `223 bn assets in FY14 clocking11.4% YoY growth. The same was 1.86 times it did in
FY11, reflecting an heartening execution trend.
PGCIL has reiterated XII plan capex guidance at ` `` `1100 billion
Projects/ Schemes 12
th
Plan
Grid Strength
18%
Central Sector
Generation
26%
Ultra Mega
Power Project
8%
Independent
Power
Producers (IPP)
48%
0
60
120
180
240
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
F
Y
1
5
E
F
Y
1
6
E
F
Y
1
7
E
`
b
i
l
l
i
o
n
Capital Outlay
9
Source: Company
8%
PGCIL reiterated its `1100 bn capex plan for the ongoing XII Plan period.
The company has a target of `224.5 billion capex for FY15 and is on course to possibly exceeding it.
With regard to the capital outlay, PGCIL raised ~`53 bn in Dec 2013 via a follow-on-public-offer (FPO). Out of the
proceeds of FPO, `27.8 bn has been utilized till Q1FY15 and remaining `25.3 bn is in term deposits
Recent uptick in commissioning and resolution of stuck projects provide earning
visibility
Projected Revenue CAGR of 16.6% during FY14-16E period
0
65,000
130,000
195,000
260,000
FY2012 FY2013 FY2014 FY2015E FY2016E
`
m
i
l
l
i
o
n
Revenue
10
PGCIL has operationalized two projects with right-of-way issues namely, JharsugudaDharamjaygarh worth ~Rs3.4bn
and AnnupurJabalpur. Additionally, the right-of-way issue at the Angul-Jharsuguda 765kV transmission line worth
~Rs8.3bn has been resolved.
The company is in finalization stage of its 1
st
energy saving project and is also receiving enquiries for a few more. It
has designed, fabricated and implemented Waste Heat Recovery System on turnkey basis for two clients in Steel
sector.
On the agri-demand side, management project in Karnataka is under implementation. Scope of the project involves
replacement of ~1300 agriculture pumps with energy efficient pumps
Revenue
Source: Company, Destimoney Research
Valuation & Recommendation
Being the leader in power transmission space and
strong execution track record, PGCIL is poised to
benefit from the sustained growth visibility in the
Indian Power Sector.
Additionally minimal impact of the latest CERC
guidelines makes PGCIL as preferred pick in PSU
basket having regulated ROEs. As per the CERC
guideline, PGCIL will retain core RoE at 15.5% on
transmission systems, the same as applicable in the
tariff period FY09-FY14, as well as in the draft
Relative Stock Performance (Sep13=100)
80
100
120
140
160
Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14
Power Grid NIFTY
11
tariff period FY09-FY14, as well as in the draft
notification issued for FY15-FY19.
At CMP of `136 per share, the stock is trading at 1.9x
and 1.7x times FY15 and FY16 book value
respectively.
We recommend BUY on PGCIL with a target price of
`168 per share.
Source: Company, Destimoney Research
FY13 FY14 FY15E FY16E
EPS (`) 9.3 9.5 10.1 11.9
CEPS (`) 14.7 16.6 19.3 22.8
P/E (x) 14.6 14.4 13.4 11.4
P/B (x) 2.7 2.1 1.9 1.7
ROE 16.3% 13.1% 13.8% 14.5%
ROCE 8.0% 7.6% 7.9% 8.3%
EV/EBIDTA (x) 13.6 11.5 9.9 8.3
Financials
Income Statement Balance Sheet
(In ` mn) (In ` mn) (In ` mn) (In ` mn) FY13 FY14 FY15E FY16E
Net Sales 131,639 156,754 179,886 212,992
Operating expense 19,501 24,116 26,826 30,240
EBIDTA 112,139 132,639 153,060 182,752
Depreciation 34,278 40,794 47,864 55,842
EBIT 77,861 91,845 105,196 126,910
Interest 25,994 32,537 41,937 51,087
EBT 51,866 59,308 63,259 75,823
Other Income 5,632 4,707 4,264 4,805
PBT 57,498 64,015 67,523 80,628
Tax 14,630 18,114 14,180 16,932
(In ` mn) (In ` mn) (In ` mn) (In ` mn) FY13 FY14 FY15E FY16E
Liabilities
Equity Share Capital 46,297 52,316 52,316 52,316
Reserves & Surplus 217,734 294,664 331,842 378,451
Deferred Revenue 37,665 45,671 45,671 45,671
Long term borrowings 640,301 777,721 867,721 1,017,721
Other long term liabilities 10,368 14,669 14,669 14,669
Long Term Provisions 4,699 5,550 5,550 5,550
Deferred Tax Liability 19,750 24,525 24,525 24,525
Current Liabilities (CL) 157,026 199,783 216,688 240,882
Total 1,133,841 1,414,897 1,558,980 1,779,784
12
Source: Company, Destimoney Research
PAT 43,126 45,476 52,973 62,404
Margins
Sales Growth % 27.7% 19.1% 14.8% 18.4%
Operating Margin % 85.2% 84.6% 85.1% 85.8%
Net Margin % 32.8% 29.0% 29.4% 29.3%
Total 1,133,841 1,414,897 1,558,980 1,779,784
Assets
Fixed Assets 1,059,429 1,317,178 1,461,632 1,681,035
Current Assets (CA) 74,412 97,720 97,349 98,749
Total 1,133,841 1,414,897 1,558,980 1,779,784
Key risks
Slowdown in capex spend or delay in commissioning could impact our revenue growth estimates negatively.
PGCILs projects are subjected to delays due to environmental approvals /clearance for passage of transmission line
through forest zone.
Lower equity contribution (below 30%) would be negative for PGCIL in long run.
13
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