Power Grid Rating | Buy — Healthy traction in earnings for company

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Published: June 11, 2019 1:01:27 AM

Prospects for new awards are bright in the fiscal, lending comfort in the near-term; ‘Buy’ retained; valuations are attractive

In the transmission sector, traction in new project awards is slow and tilted towards green energy corridorIn the transmission sector, traction in new project awards is slow and tilted towards green energy corridor

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.

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