Power Grid Corp of India’s (PGCIL’s) Q4FY19 PAT, adjusted for deferred tax liability, at Rs 24.6 bn came in line with estimate. Key highlights: 1) though FY19 capitalisation/capex ratio was lower at 0.9x, we expect FY20 ratio at 1.4x led by part commercialisation of 800KV Raipur/Pugalur line; and 2) following a sedate FY19, new project awards in FY20 are pegged at `200 bn and we expect PGCIL to win 50% of these. In the transmission sector, traction in new project awards is slow and tilted towards green energy corridor/TBCB (tariff based competitive bidding) projects. That said, visibility on PGCIL’s near-term earnings is decent. This, along with attractive valuation (9x FY20E PE) and 4.5% dividend yield, is comforting. Maintain Buy with an SoTP-based TP of `225.
Healthy traction in earnings; FY19 TBCB RoE on expected lines
Q4FY19 revenue jumped 18% YoY with consolidated capitalisation at about `92 bn in Q4FY19 including
`27 bn towards TBCB projects. PGCIL recorded `3.9 bn of provision expense in Q4FY19, adjusting for which the Q4FY19 EBITDA came 5% above our estimate. In FY19, TBCB projects’ revenue/PAT came at `10.0/1.9 bn, implying 11% RoE in TBCB (`18 bn equity invested), although it does not capture the impact of recently commissioned projects (about `4 bn equity in Q4FY19). Adjusted for this, Return on Equity (RoE) on TBCB projects is in the 14-15% range, broadly converging with regulated projects.
Rs 190-bn project awards on the cards; capitalisation to be back-ended
Management expects `190-bn (`93 bn inter-state, `97 bn intra-state) project awards in FY20. We expect:
1) PGCIL to garner 50% of these projects; and 2) final ordering to be awarded over the next three-six months. Management expects `200-250 bn capitalisation in FY20 (`150 bn capex) and this is likely to be back-ended as Raipur-Pugalur HVDC forms a significant portion, which is targeted in H2FY20.
Outlook and valuation: Comforting valuations; maintain ‘BUY’
Post a strong FY14-19 (`240 bn average), capex could moderate as incremental project awards have dipped considerably. `700-bn projects in hand impart healthy two years’ earnings visibility – this can keep the capitalisation ratio at more than 1.0x comfortably – though new project awards will be a key variable as generation capacity and inter-regional transmission corridors seem to be topping out. PGCIL offers a defensive play with attractive valuations of 1.5/1.4x & 9.1/8.4x on FY20/21E P/BV and P/E, respectively. We maintain ‘BUY/SP’ with TP of `225.