Buy Power Grid; target of Rs 118: Karvy Stock Broking

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Buy Power Grid; target of Rs 118: Karvy Stock Broking

Karvy Stock Broking is bullish on Power Grid Corp and has recommended buy rating on the stock with a target of Rs 118 in its December 1, 2011 research report.

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Karvy Stock Broking is bullish on Power Grid Corp and has recommended buy rating on the stock with a target of Rs 118 in its December 1, 2011 research report.

"Power Grid Corporation of India (PGCIL) plans capex to the tune of Rs. 1.2 trillion (~US$27 bn) in 12th Plan period (FY12-17), as against Rs. 0.55 trillion in 11th Plan. The power sector stocks have underperformed in last 12 months due to issues related to fuel shortage and weak financial health of the State Electricity Boards (SEBs), which we highlighted in our thematic report "Indian Power: Fuel Security" in Jul'11. In the power utilities space, we believe that PGCIL is the best stock to pick up, as it is least exposed to operational risks, while offering a safe bet in India's power transmission."

"PGCIL has currently operating 23,800MW transmissions capacity, and we expect that large capacity addition in generation in FY12-13E could improve projects execution in FY12-13E, when capitalisation is seen at Rs. 93-119 bn, as against Rs. 28.8 bn & Rs. 75.5 bn in FY10 & FY11, respectively. We expect the regulated asset base to grow to Rs. 374 bn in FY17E due to generation capacity addition and system strengthening. From FY10 onwards, PGCIL earns an assured post-tax RoE of 15.5% on the equity invested in its capitalized transmission projects along with network availability-linked incentives and early commissioning incentives for projects. We expect core RoE for PGCIL to remain at 17.5-18% till FY17E. We expect EPS CAGR growth will be 19% FY11-14E. Based on Short-Term Open Access (STOA) capacity projections of 18GW by FY15E, we expect PGCIL's volumes under STOA likely to increase to 100 BUs resulting in revenues to the tune of Rs. 4 bn in FY15E. We believe consultancy business will witness 11% CAGR from Rs. 2.9 bn in FY11 to Rs. 5.5bn."

"At the CMP, the scrip trades at 1.8x FY13E and 1.6x FY14E P/BV, respectively and 13.2x P/E of FY13E and 11.1x FY14E, which we believe is at a 28% & 36% discount to its historical average (FY07-11) P/B multiple. We use DCF methodology to value PGCIL, given the stable cash profile of its regulated business. We discount each cash flow assuming a COE of 15% to arrive at a fair value of Rs 118 per share," says Karvy Stock Broking research report.

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To read the full report click on the attachment