Power Grid Corp rating Buy; Delivering growth

By: |
Updated: August 11, 2016 4:22:35 PM

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.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition