Power Grid Corporation of India (PGCIL) is among the largest transmission utilities in the world and is one of the best plays on the power sector in India owing to its assured ROE model and strong earnings visibility.
Huge investments lined up for augmenting power generation and transmission capacities: Power generation capacity in the country is expected to increase to ~318GW by the end of the XII plan and a further addition of ~110GW has been planned during the XIII plan. The transmission sector is also expected to see huge investments of ~Rs1,80,000cr and ~Rs2,00,000cr during the XII and XIII plan, respectively. A majority of these investments are expected to be towards
inter-regional transmission.
Regulated ROE model assures steady earnings growth: PGCIL receives a fixed return on equity (ROE) of 15.5%, with an additional 0.5% for timely completion of projects, as per norms laid out by the Central Electricity Regulatory Commission (CERC). The fixed ROE model implies that earnings growth is directly linked to the growth in assets capitalised. We estimate PGCIL’s current projects under implementation to be upwards of Rs1,00,000cr, providing strong earnings visibility.
Strong capex plans to drive growth: PGCIL has incurred a capex of ~Rs60,000cr since the beginning of FY2013 and remains well on track to achieve the XII plan capex target of Rs110,000cr. Further, we expect ~60-65% of XIII plan investments in the transmission sector toward inter-state transmissions, implying a capex outlay of ~Rs1,20,000-1,30,000cr by PGCIL. The pace of capitalisation has also picked up in recent years, with FY2015 expected to have a capitalisation to capex ratio of >1.
Outlook and Valuation: Led by the strong capex plans and a healthy capitalisation rate, we expect PGCIL to report a top-line and bottom-line CAGR of ~15% and ~17% over FY2014-17E. At the current market price of Rs147, the stock trades at a P/B of 1.8x and 1.7x its FY2016E and FY2017E BV of Rs79.7 and Rs88.7, respectively. We initiate coverage on the stock with a Buy recommendation and a target price of Rs170, based on ~1.9x FY2017E book value, implying a 16% upside from the current levels.

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