>POWER GRID CORPORATION OF INDIA: Low-risk exposure to India’s s power sector

■ We initiate coverage with an anti-consensus Buy rating
Power Grid Corporation of India (Power Grid) is the government-appointed central
power transmission utility. We estimate India will add 100,000MW of generation
capacity in FY11-17, a three-fold increase, and that transmission and distribution
capex will reach 80% of generation capex by FY15 (compared with the historical
average of 40-45%). We think Power Grid will be a key beneficiary of this growth;
it already has more than a 50% market share and we expect this to increase.

■ Natural monopoly business, Power Grid is the central transmission utility
Power transmission is a natural monopoly and Power Grid’s status as the central
transmission utility means it is also the co-ordinator of private sector participation in
the sector. This is the key difference from generation where no utility has this role.

■ Low-risk business model, 17-18% assured ROE
Power Grid has a low-risk business model, earning a regulated ROE of 17-18% on
operating assets. We estimate it will invest approximately Rs600bn in transmission
capex over the next five years, funded 70:30 through debt:equity, with the equity
contribution coming from internal accruals. As a government-owned company,
debt funding is not a concern. Power Grid has an ROIC of approximately 12% on
its transmission investment, with all costs as pass through.

■ Valuation: price target of R135.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool, assuming 10.1% WACC.
Based on FY12E P/BV, Power Grid is trading at a 5% discount to National
Thermal Power Corp (NTPC), which we think makes it particularly attractive.

To read the full report: POWER GRID