>Power Grid Corporation (CENTRUM)

* 86% of 11th Plan investment target to be met: We believe, fears that PGCIL would fall short of its proposed Rs550bn investment target in the 11th Five-Year Plan are overdone. The company is expected to spend around Rs409bn on capex during FY09-12E, taking the total
investment to Rs475bn, which is 86% of the target.

* 42% of projects are system-strengthening or national grid projects; no major delays expected: Further, about 42% of the proposed capex is for system- strengthening and national grid projects. We believe these projects would be commissioned on schedule and don’t foresee any major delays.

* Execution capabilities better in transmission sector compared to generation: During the last 3 Five-Year plans, the transmission sector has achieved more than 90% of its capex targets, whereas the generation sector fared poorly with only about 50% execution level.

* Comfortably leveraged to meet capex requirements: PGCIL is comfortably placed in terms of debt-equity ratio to meet the capex needs. We expect the D/E ratio to increase from 1.7x in FY08 to about 2.4x in FY12E close to regulated D/E ratio.

* New CERC norms to impact positively: We believe the new CERC norms would positively impact PGCIL with ROE increasing 200bp from 14% to 16% and allowance of grossing up at MAT rate of 11.33% for new projects with 80IA benefits.

* Buy with target price of Rs115: We initiate coverage with a Buy and target price of Rs115. We believe PGCIL’s ideal one-year forward P/BV should be 3x, a 20% premium to the base multiple of 2.6x, considering better leveraging and high capex growth. Further possibilities of interest rate fall in the economy would make annuity based revenue models more valuable.

* Key Risks: Upside risk to the price target will be a higher Capex (more than Rs409bn estimated) for the period FY09-12E. Downside risk can arise from changes in the current regulatory framework of availability based tariff

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