Friday, February 10, 2012

>POWER GRID CORP OF INDIA: 3QFY12 earnings – Actual vs. Consensus; Solid 3QFY12; capitalisation broadly on track

■ 3QFY12 – Sales, EBITDA in line, net profit 12% above forecast
At Rs8.1bn, PWGR’s 3QFY12 net profit was 12% and 10% above our and consensus forecasts, respectively; while revenues / EBITDA were in line with our forecast (2%/4% above consensus), the positive surprise at the bottom line was on account of lower-than-expected ‘net’ interest outgo, and an exchange fluctuation ‘gain’ (elaborated below). If we were to normalise for the net exchange ‘gain’, 3QFY12 adjusted net profit would be Rs781mn – still 8% and 6% above our and consensus forecasts, respectively.

■ 9MFY12 capitalisation at Rs63bn; our FY12F target (Rs88bn) appears in sight
We understand that incremental capitalisation in 3QFY12 stood at ~Rs22bn, expectedly lower than the Rs32.5bn capitalisation in 3QFY12. As 9MFY12 capitalisation stood at Rs63bn, while our FY12F capitalisation (Rs88bn) appears very much achievable, management’s long-standing FY12 capitalisation target of Rs100bn may just be a stretch – we expect more colour on this at the 10 Feb analysts’ meeting.

■ Transmission revenues up 10.4% q-q, a tad above our forecast
At Rs22.5bn, 3QFY12 transmission revenues posted a 10.4% q-q rise (up 18% y-y), which was largely expected as capitalisation in 2QFY12 was back-ended and Phase-I of the Mundra UMPP transmission system was capitalised on 1 Oct, 2011. However, overall revenues were a tad below our forecast (but 2% above consensus) as revenue from shortterm open access (STOA) and telecom business lines came in over 20% below expectations. We note that rebate to customers during the quarter stood at 0.6% of transmission revenues, sharply lower than ~1.3% in 1HFY12, potentially indicating lengthening of the revenue recovery
period (debtor days).

■ Positive surprise on lower ‘net’ interest outgo, f/x fluctuation ‘gain’
At Rs3.6bn, 3QFY12 net interest expense (excluding rebate to customers and exchange fluctuation gain/loss) was ~7% below our forecast. Notably, despite the magnitude of INR/USD depreciation in 3QFY12 being similar to 2QFY12, PWGR posted an exchange fluctuation gain of Rs110mn (vs. our forecast exchange fluctuation loss of ~Rs600mn) on account of: (1) reassessment of f/x loss recoverable from beneficiaries on the back of a Dec 2011 clarification from the regulator (CERC) given to a regulated return generating company, and (2) PWGR adopting Rule 46A provision (notified by the government on 29 Dec, 2011), which allows capitalisation of exchange variation loss on account of settlement/restatement of long-term monetary liabilities related to depreciable capital assets. Had PWGR not adopted the Rule 46A provision (which is now the default policy going forward), net profit would have been lower by Rs314mn, implying an adjusted net profit of Rs781mn (still, 8% and 6% above our and consensus forecasts, respectively)

■ We await management’s commentary at 10 Feb analysts’ meeting
At PWGR’s upcoming analysts’ meeting in Mumbai (on Friday, 10 Feb), we particularly await management’s commentary regarding: (1) capitalisation/ capex outlook (and its broad build-up) for FY12/FY13 and the XIIth Plan; (2) debtor days, payment realisation from SEBs, and (3) revenue growth and profitability prospects of ancillary business lines. 

■ Maintain BUY, we believe long-term mid-teen EPS growth prospects remain intact
PWGR remains our top pick in the power utilities space; prospects of mid-teen FY11-17F EPS CAGR remain intact, in our view. On our FY13F earnings forecast, the stock trades at 14.4x P/E and 2.0x P/BV, implying a 15%/10% discount to its three-year average rolling one-year forward multiples, and a 7% premium to NTPC on its FY13F P/BV multiple (in line on P/E).