Q1FY20 results show weakness in new T&D projects—just 6% adj PAT growth missing our and consensus estimate by 9/5%. Downgrade PGCIL to Reduce rating (from ADD) as the stock has moved up 12% in 3 months and has no upside to our TP. We have also reduced EPS by 5-7% for FY20-22e on slower growth in regulated business.
PGCIL’s stock will remain range-bound on lack of growth options and diversification – (i) we expect 6/9% BV/PAT CAGR over FY19-22 and capitalisation rate to halve for regulated T&D projects, but TBCB to grow through green energy corridors; (ii) company raised its dividend payout to 45% vs. 35% y-o-y and is likely to increase it further on lack of growth options; and (iii) valuations are undemanding at 10.6x PE /1.7x P/B for 16% RoE, but upside potential is limited including 4-5% dividend yield.
Q1 – a miss: PGCIL’s Q1 was weak with decline in consultancy and low growth in power transmission. Recurring PAT was at Rs 23.4 bn (+6% y-o-y) given one-offs related to prior period. We attribute the miss to new regulations tightening O&M norms and incentives. New project capitalisation declined 60% to Rs 14.7 bn and capex was down 55% to Rs 29 bn in Q1.
TBCB opportunity growing but regulated falling at sharper pace: PGCIL expects Rs 430 bn green energy corridor and Rs 88 bn intra-state opportunities largely thorough TBCB. It has maintained 40% market share in recent wins, but competition has risen with ATC/Project cost <10% (vs. 16% for regulated) and more bidders as per our checks.