Power Grid Corporation of India Ltd. (PGCIL) reported FY09 results way above our expectations with a 42% y-o-y growth in net sales.
In FY08, the Company had announced plans to add 60,000 circuit kilometres of transmission network by 2012. So far, it has successfully added 7,207 circuit kilometres.
We believe that this expansion in its capacity will boost the transmission revenues of the Company, which is expected to increase at a CAGR of 20-25% during FY09-FY12.
During FY09, PGCIL reported a return on equity (RoE) of 11.7%. We believe that the Company’s RoE will improve from the current levels to 15-16% by FY13-14, following the change in CERC’s guidelines.
Further, we expect the Company to continue generating incentive income, which would mean a higher effective RoE on the transmission projects.
The GoI is planning a number of pit-head power projects of sizable capacity. These would require a strong transmission network to be able to dispatch electricity to the various project beneficiaries. PowerGrid, the only transmission company in the country, is set to benefit significantly from this scenario.
At Rs103.6, the stock is trading at a P/B multiple of 2.98x for a book value of Rs. 35 at the end of FY09.
By comparing the expected returns of PGCIL with the current yield of a 10-year AAA bond, i.e. 9.13%, we have arrived at a target P/B multiple of 3.55x for the Company’s stock.
We have assumed a conservative RoE cap of 13.5% from FY15 onwards. This gives a fair value of Rs. 123 for PGCIL’s stock, indicating a 19% upside potential from the CMP. Thus, we reiterate our BUY rating.