Power Grid: Stable business, low volatility along with steady return

India Infoline News Service | Mumbai |

PWG is a monopoly play in the regulated transmission business in India and its one of the better managed PSUs.

CMP Rs120, Target Rs142, Upside 18.3%

Power Grid (PWG) is a monopoly play in the regulated transmission business in India and its one of the better managed PSUs. The company is in a regulated business which assures minimum 15.5% ROE; guarantees reasonable profitability along with steady returns. Power Grid has also consistently maintained average system availability above 99.94% at par with the International utilities, thus leading to higher income under the incentive based tariff structure.


PWG, Navaratna PSU, is India's Central Transmission Utility (CTU) and carries about 50% of India's generated electricity. As on 31 August 2012, it has a transmission network of about 95,846 circuit km with 157 EHVAC/HVDC substations. PWG plans Rs1,000bn of capex during the XIIth Five Year Plan (FY13-17). For power grid the asset base increases with every tick.  Additionally, PWG also provides chance to participate in power sector reforms as the company is the indirect beneficiary. Indirectly coal shortage and other issues can still impact growth, but with regulatory support like payment protection mechanism (PSDF scheme), which deals with opertionalisation of transmission project despite delay in generation project increase our confidence.


The company derives 95% of revenue from transmission business, but to de-lever its trying to diversify in broadband and telecom services and also in consultancy for T&D projects in India and abroad (overseas EPC contract worth Rs100bn to be executed). We believe EPS CAGR of 21% over FY12-14E with an average RoE of 16% makes it one of the safe and attractive bet in troubled utility sector. But, dilution concerns and rich valuations may limit upside. We value the company on the basis of the price to book. We assign BUY rating on PWG with a 9-month target price of Rs142.


Financial summary
Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Revenues 83,887 100,353 125,496 144,746
yoy growth (%) 25.6 19.6 25.1 15.3
Operating profit 69,439 83,824 105,661 121,936
OPM (%) 82.8 83.5 84.2 84.2
Reported PAT 26,969 32,550 41,155 47,653
yoy growth (%) 20.8 20.7 26.4 15.8
         
EPS (Rs) 5.8 7.0 8.9 10.3
P/E (x) 20.6 17.1 13.5 11.7
Price/Book (x) 2.6 2.4 2.1 1.9
EV/EBITDA (x) 13.4 12.6 11.2 10.6
Debt/Equity (x) 1.9 2.2 2.5 2.6
RoE (%) 14.5 14.5 16.6 17.2
RoCE (%) 9.1 9.0 9.5 9.4
Source: Company, India Infoline Research

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