Power Grid (PGCIL) reported Q4FY17 below expectations given back-ended capitalisation within Q4. Operationally, EBITDA rose by 13% y-o-y, supported by sales growth. Capitalisation in FY17 was down 2% y-o-y to Rs 310 billion and management expects it to be Rs 300-350 billion in FY18E.
We believe earnings growth will decelerate ahead as capitalisation growth has peaked. Maintain Hold with a TP of Rs 200 (v/s Rs 190), and rollover our TP by 1-yr to 1.7x P/B FY19E.
PGCIL earns a regulated ROE on its commissioned projects, and asset capitalisation is critical for its earnings growth. PGCIL has spent Rs 244 billion up 8% y-o-y in FY17. Capitalisation has been Rs 310 billion down 2% y-o-y in FY17 and management highlighted that a Rs 10 billion project to be capitalised in Q1FY18 is commissioned already.
Management guided for Rs 300-350 billion of capitalisation in FY18E. Our estimates factor the lower end of the guidance as issues on right of way have been cropping up on incremental plans on PGCIL.
PGCIL is executing Rs 1.1 trillion of projects between FY18E-21E (`263 bn annually). FY16 saw capitalisation at Rs 318 billion and gross block growth peaking at 27% y-o-y. This has reflected in 25% y-o-y growth in FY17earnings.
Gross block growth is up 21% y-o-y in FY17 and should rise 17% y-o-y in FY18E and 13% y-o-y in FY19E. Slowing gross block growth will reflect in slowing earnings growth in FY18E-19E. Pure TBCB environment implies that annual capex has the risk of a decline post next 3-5 years with gross block growth eventually dropping to single digits. 25% of FY18E-19E capitalisation is likely to be Tariff based Competitive bidding (TBCB) projects. Fluctuations in financing cost, project cost overruns, and right of way delaying projects are hurdles that could have a material impact on returns unlike regulated projects. Our estimates factor TBCB having similar returns as regulated projects, which could itself be a potential negative surprise.
Maintain Hold with a TP of Rs 200 v/s Rs 190, which values PGCIL at 1.7x P/B FY19E 11% discount to its historical average v/s 1.8x FY18E earlier to factor in some certainty of new regulatory regime returns of FY20E-24E. Upside risk: government giving PGCIl preference on upcoming projects. Downside risk: PGCIL losing share sharply in TBCB.