>Power Grid Corporation of India (CITI)

■ Upgrade to Hold (2L) — We move from Sell (3L) as we believe PGCIL should trade in line with NTPC given: (1) the scarcity value (the only listed play on Indian power transmission) vis-à-vis plenty of generators to chose from; (2) the differential between PGCIL’s and NTPC’s RoEs has narrowed; (3) defensive appeal of the business; and (4) stock has underperformed the BSE Sensex by 90% over the past year. This is despite NTPC's ability to make superior ~22% regulated RoE on its core business compared to PGCIL's ~17% and its stronger balance sheet.

■ Target price increased to Rs116 — We increase PGCIL’s target P/BV multiple to 2.7x FY11E (2.3x earlier), bringing it in line with that of NTPC’s implied target P/BV multiple (from 10% discount earlier). This, along with the roll forward to Mar11 (from Mar10 earlier) and EPS revision, increases our target price to Rs116.

■ Leverage and shorter execution cycles maximize company RoEs — Under the regulated regime, utilities should ideally leverage to the maximum (interest costs are a pass through) and have high dividend payouts to maximize company RoEs. A shorter execution period reduces the quantum of unproductive CWIP vis-à-vis productive commissioned assets. Intrinsically, transmission line projects can be executed ~50% faster than a generation project which leads to PGCIL’s CWIP being a percentage of net fixed assets than NTPC’s.

■ Likely achievement of 93% of XIth Plan capex targets — In the first two years of the XIth Plan, PGCIL’s capex of Rs148bn was 27% of the XIth Plan target of Rs545bn. We expect the company’s capex to be Rs360bn in the remaining three years of the plan and to achieve 93% of XIth Plan capex targets.

■ Our top picks —In order of preference, we continue to recommend Tata Power (TTPW.BO; Rs1,348.35; 1L), NTPC (NTPC.BO; Rs201.30; 1L), Lanco Infratech (LAIN.BO; Rs51.75; 1M) and CESC (CESC.BO; Rs398.00; 1M).

To read the full report: POWER GRID