Solid defensive growth prospects, sustainable competitive strength afford a premium
Growth prospects upbeat; TP raised to Rs174: As transmission capacity startup goes into top gear and exceeds capex in FY16 and capex-commissioning remain in tandem thereafter, we believe Power Grid’s medium-term earnings outlook remains robust (FY15-17F EPS CAGR: 19%) and cash flows visibility is set to improve.
We nudge our FY16F onwards EPS (earnings per share) forecasts by 2-6% and raise our target price by 16% to Rs174, implying 18% potential upside from current levels. Power Grid remains our preferred stock pick amongst power utilities in India.
Expect reported RoE at 16%: We raise our transmission capacity startup forecasts for FY15F/ 16F/17F (forecast) by 12%/20%/ 9% to Rs215 bn/Rs243 bn/Rs220 bn, implying 96%/113%/102% of core transmission capex (cash basis) in the respective years
We continue to assume zero returns on equity investments in SPVs (specioal purpose vehicles) housing bid tariff-based transmission projects and transmission JVs with state governments. Overall, we tweak FY15F/16F EPS by -2%/+2%; expect RoE to rise to 16% in FY17.
Valuation: Power Grid trades at 1.6x FY17F P/B (BVPS—book value per share– Rs92/share) (three-year/five-year average of forward P/B multiples is 1.7x/1.8x); our implied FY17F P/B (price-to-book) multiple is 1.9x. We expect the stock to continue to trade at a premium to peers on account of solid defensive growth prospects and sustainable competitive strength in the sector.
The next big test: steadfast execution: Over the past three-four years, Power Grid’s cohesive senior management, led by its chairman (RN Nayak), has instilled the DNA of unrelenting ‘execution focus’ in the organisation, which is reflected in the robust y-o-y growth in earnings. As the GOI appoints a successor to Nayak, who superannuates in Sep-2015, we believe that continuity of ‘execution focus’ under the new leadership will be critical to gauge Power Grid’s ability to deliver growth in the longer term.