Power grid reported 14% y-o-y growth in net income at Rs 20.5 bn, despite provisions for higher employee cost and exchange-linked losses. Asset capitalisation during the quarter was Rs 35 bn, though capex maintained momentum (Rs 65 bn). Valuations may appear rich at 1.8X P/B and 12X P/E on FY2019e and at a premium to other players in the utility space, though earnings growth remains strong at 16% CAGR during FY2017-19e. Maintain Buy rating with target price of Rs 250/share. Strong earnings show continues, employee provision and accounting adjustment a drag Power Grid reported a 14% y-o-y growth in net income at Rs 20.5 bn, marginally below our estimate of Rs 20.8 bn. Asset capitalisation for the quarter remained robust at Rs 36 bn, +42% y-o-y and capex of Rs 63 bn, that likely took gross block to Rs 1.9trn though increased CWIP to Rs 477 bn.
Employee costs included a provision of Rs 861m for revision in wages that dent reported earnings that came in 2% below estimates. We note that the same would eventually be recoverable through tariffs under the cost-plus mechanism. Higher other expenses during the quarter are reflective of foreign exchange rate variations of Rs 500m, though there is a corresponding increase in rate regulated income accounted for with other income. Higher interest and depreciation expense is reflective of continued momentum in asset capitalisation.
Investment approval and ordering moderate, as execution takes centre stage
PWGR capitalised assets aggregating Rs 35 bn during the quarter besides incurring large capex of Rs 65 bn. At the end of March 2017, we estimate PWGR to have a gross block of Rs 1.9 trn, and CWIP of Rs 477 bn. We highlight that PWGR commissioned 1,083 cktkms of transmission lines and 4,500 MVA of substations in Q1FY18, compared to 11,669 cktkm and 35,435 MVA of transmission lines and substations in FY2017.
Investment approvals of Rs 11 bn were given during the quarter, taking the total portfolio of approved projects to Rs 1.3 trn, 95% of the incremental plan of Rs 1.4 trn of asset addition outlined in March 2016. We do anticipate a reduction in approval and ordering activity with ordering activity of Rs 1 trn (72% of plan) completed for the current plan period.
Maintain Buy rating
We maintain our BUY rating on PWGR with a target price of Rs 250/share based on March 2019e DCF. We build a high-growth earnings trajectory for the company up to FY2022 based on incremental project visibility, especially given the strong capex and approval trends. We have revised our earnings estimates downwards by 5% for FY2018e to factor higher wage cost and other expenses, partially offset by other income. At 1.8X P/B and 12X P/E on FY2019e, PWGR trades at a premium to the rest of the utility space, taking cognisance of the step-up in earnings as ~Rs 477 bn of CWIP will likely be capitalised over the next two years.