>Power Grid (INDIABULLS)

POWER GRID CORPORATION OF INDIA LTD - BUY

Unleashing its potential
Our enthusiasm in Power Grid Corporation of India Ltd. (PGCIL)’s stock has been lighted up by the encouraging tariff determination norms issued by the CERC for FY10–14. As a result, we have increased our target price for PGCIL’s stock from Rs. 110 to Rs. 120 and maintain our Buy rating.

* Overall RoE to improve significantly in the next 4-5 years: We see the Company’s RoE improving from 11.7% in FY08 to 16-17% by FY13-14 due to the following reasons:

· CERC’s increase in the cap on the RoE from 14% to 15.5% for tariff determination purposes implies higher guaranteed returns on the transmission projects for FY10-14.

· We expect the Company to continue generating incentive income, which would mean a higher effective RoE on the transmission projects.

· Equity deployed in the transmission assets would increase significantly in the next 2-3 years as the Company has huge CAPEX plans. We do not see any major delays in the commissioning of new transmission lines as the Company has a stable cash-generating business model and strong GoI support for funding its projects.

· The Rs. 14.4 bn worth of GoI bonds issued to PowerGrid would be completely redeemed by FY16 in equal half yearly instalments. As these funds would be invested in higher return-generating transmission assets, the Company’s overall profitability should improve.

* Bright long-term prospects: Most of the power projects being planned for the future by the GoI are pit-head and of sizable capacity. These would require building a strong transmission network for dispatching electricity to the various project beneficiaries. PowerGrid, the only transmission company in the country, is set to benefit significantly from this scenario.

To see full report: Power Grid