We initiate coverage with an anti-consensus Buy rating Power Grid Corporation of India (Power Grid) is the government-appointed central power transmission utility. We estimate India will add 100,000MW of generation capacity in FY11-17, a three-fold increase, and that transmission and distribution capex will reach 80% of generation capex by FY15 (compared with the historical average of 40-45%). We think Power Grid will be a key beneficiary of this growth; it already has more than a 50% market share and we expect this to increase. Natural monopoly business, Power Grid is the central transmission utility Power transmission is a natural monopoly and Power Grid's status as the central transmission utility means it is also the co-ordinator of private sector participation in the sector. This is the key difference from generation where no utility has this role. Low-risk business model, 17-18% assured ROE Power Grid has a low-risk business model, earning a regulated ROE of 17-18% on operating assets. We estimate it will invest approximately Rs600bn in transmission capex over the next five years, funded 70:30 through debt:equity, with the equity contribution coming from internal accruals. As a government-owned company, debt funding is not a concern. Power Grid has an ROIC of approximately 12% on its transmission investment, with all costs as pass through. Valuation: price target of R135.00 We derive our price target from a DCF-based methodology and explicitly forecast long-term valuation drivers using UBS's VCAM tool, assuming 10.1% WACC. Based on FY12E P/BV, Power Grid is trading at a 5% discount to National Thermal Power Corp (NTPC), which we think makes it particularly attractive. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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