Power Grid had a target to spend Rs550 billion in the eleventh five-year plan. The company spent only Rs60 billion in FY08 versus the Planning Commission of India’s target of Rs110 billion.
In FY09, PGCIL plans to spend Rs80.4 billion versus the Planning Commission’s target of Rs112 billion. We had earlier assumed a capex spend of Rs550 billion from FY08-12 will translate into an earnings growth of 20% for the next four years.
Based on actual spends for the first two years of the plan, we believe that it would be difficult for Power Grid to achieve the target capex spend. We therefore cut our FY08-12 capex assumptions for Power Grid by 30% to Rs385 billion.
We reduce our revenue estimates for the consultancy and telecom operations of the company. We cut our telecom revenue on the back of slowing operations in H1FY09.
The company has seen only a 10.7% y-y growth in H1FY09 compared to over 40% growth in each of the last four years.
In addition, the division’s pre-tax margins have turned negative in the last two quarters. We are bringing down our revenue projections for the telecom segment by 47.8% to Rs1,609 million in FY10 compared to our previous estimate of Rs3,082 million. We now project a revenue growth of 16.1% from FY08-11.
Earlier we were projecting a telecom revenue growth of 58.7% from FY07-10. We expect telecom revenues to account for 2.6% of sales in FY10.
Similarly, we are also reducing our revenue estimates of the consultancy business by 16.5% in FY09 and by 16% in FY10 based on lower than expected revenue in the last two quarters.
We project a revenue growth of 9.9% in FY08-11. We were earlier expecting consultancy revenue to grow by 14.9% in FY07-10. We expect consultancy revenue to account for 4.5% of sales in FY10. In FY10, we expect the telecom and consultancy segments to account for 7.1% of overall sales.
We reduce our price target by 25% from Rs80 to Rs60. We have used the two stage Gordon model to arrive at our target P/BV multiple of 1.58x, and applied it to our FY10 book value of Rs38.08 to arrive at a target price of Rs60 per share. Our target price implies a P/E multiple of 14.5x on our FY09 EPS estimate of Rs4.13.