InvIT cash to be used for capex; FY21-22e EPS up 2-5%; ‘Hold’ retained given medium-term earnings concerns
The stock has de-rated in the last 3-5 years on a weak growth outlook and 6% dividend yield limits absolute downside.
Q2FY21 profits beat was due to higher other income. Consolidated capex is down 14% y-o-y and capitalisation is up 154% y-o-y as Rs 95 bn of the Rs 195-bn Raigarh Pugalur project was commissioned. Higher surcharge income drove the 67% y-o-y other income rise. We raise our FY21e-22e EPS by 2-5% to account for the same. The stock has de-rated in the last 3-5 years on a weak growth outlook and 6% dividend yield limits absolute downside. Maintain Hold.
Rs 179 bn is the near-term bid pipeline vs PGCIL’s Rs 182-bn FY20 capitalisation: Inter-state renewable projects is Rs 160 bn and intra-state projects is Rs 19 bn of the bid pipeline. All projects are on competitve bidding (TBCB) and mgmt expects them to be closed in the next 3-6 months. Additionally, RE evacuation projects in Ladakh, Lahaul Spiti, Rajasthan and Gujarat are being finalised. This could be worth Rs 280-300 bn. PGCIL has 30% market share in TBCB projects awarded to date, implying Rs 144 bn awards of the current pipeline.
1st Invit to be completed by end FY21e: PGCIL has classified 5 of its TBCB assets, having a gross block of Rs 70 bn, as held for sale. Mgmt reiterated its commitment to complete the Invit by FY21e. Proceeds of the Invit will only be utilised for funding new opportunities. Recently, the Niti Aayog recommended PGCIL should bundle Rs 200 bn assets of TBCB assets and regulated return projects for an InVit. However, we believe this is not practical as uncertainty of long term ROE and stamp duty leakage will impact the regulated asset valuations.
Maintaining capitalisation guidance of Rs 200 bn in FY21e: PGCIL has Rs 410 bn worth of projects in hand, of which Rs 225 bn are ongoing, Rs 66 bn new projects and Rs 120 bn TBCB projects. It expects to commission the partly capitalised Raigarh Pugalur project fully by end-FY21e. Debtor days are up 22% y-o-y but mgmt is confident of its monetisation. Maintain Hold with a PT of Rs 170 (1.1x P/B Sept 22e vs FY22e earlier — 35% discount to historical average), as medium-term earnings growth visibility is a question mark.