Buy Power Grid; target of Rs 233: Motilal Oswal

Motilal Oswal's research report on Power Grid

4QFY19 standalone (S/A) reported PAT grew 52% YoY to INR30.5b, boosted by prior-period sales and other likely one-offs on annual tariff adjustments. For FY19, S/A reported PAT rose ~21% YoY to INR99.4b even as gross block (proxy for regulated equity) grew by ~12% YoY. The growth was aided by prior-period revenue of ~INR2.8b and other one-offs. S/A capitalization stood at INR192b in FY19 (INR64b in Q4FY19) v/s INR273b in the previous year. Group capitalization stood at INR258b. PAT of TBCB companies increased INR1.5b YoY to INR1.9b in FY19 on commissioning of three projects (to seven now) and a weaker base. Consol. PAT grew by a healthy 22% YoY to INR100.3b, led by a 15% YoY increase in gross block and a weaker base in TBCB. PWGR took a provision of INR3.9b pertaining to delay in payment by a private generator that is under stress. This is surprising given the assured return model of PWGR. PWGR loses revenue for the period when a generator defaults/relinquishes on a transmission line and until the asset is transferred under the POC mechanism.

Outlook

At CMP, the stock is trading attractively at 1.5x FY20E P/BV. RoE is strong at ~16-17%, while cost of equity (CoE) is ~10-11%. PWGR has ~INR700b (incl. CWIP) of projects pending capitalization that provides visibility of earnings growth. Maintain Buy with a DCF-based target price of INR233.