1

Power Grid Corporation of India Ltd (PGCIL)

BUY Target Price: Rs.131.00

CMP: Rs.113.60 Market Cap.: Rs.478124.22 mn.

Date: February 03, 2010

Key Ratios:

Particulars FY09 FY10E FY11E

OPM (%) 88 93 93

NPM (%) 25 31 31

ROE (%) 12 12 12

ROCE (%) 16 18 18

P/BV(x) 3.27 2.87 2.52

P/E(x) 28.28 23.49 20.59

EV/EBDITA(x) 8.17 7.70 6.94

Debt Equity Ratio 1.95 1.76 1.65

Key Data:

Sector Power Sector

Face Value Rs10.00

52 wk. High/Low (Rs.) 128.35/82.85

Volume (2 wk. Avg.) 622000

BSE Code 532898

SYNOPSIS

• POWERGRID, the Central Transmission Utility (CTU)

of the country, is engaged in power transmission

business with the mandate for planning, co-

ordination, supervision and control over complete

inter-State transmission system.

• Power grid has diversified its business areas like

Consultancy, telecommunication, distribution and

rural electrification.

• PGCIL has approved Rs.1603cr. investment for

system strengthening in various regions.

• Power Grid Corporation of India has approved its

equity participation of 26% in the joint venture

company Power Transmission Company Nepal with

Nepal Electricity Authority.

• Net sales and PAT of the company are expected to

grow at a CAGR of 17% and 17% over 2008 to 2011E

respectively.

Share Holding Pattern:

V.S.R. Sastry

Vice President

Equity Research Desk

91-22-25276077

vsrsastry@firstcallindiaequity.com

Dr. V.V.L.N. Sastry Ph.D.

Chief Research Officer

drsastry@firstcallindia.com

2

Table of Content

Investment Highlights ............................................................................................................ 3

Company Profile…………………………………………………………………………………………………………………….5

Peer Group comparison………………………………………………………………………………………………….….….6

Keyconcern………………………………………………………………………………………………………………….…………6

Financials……………………………………………………………………………………………………………………………….7

Charts………………………………………………………………………………………………………………………….………...9

Outlook and conclusions……………………………………………………………………………………………………....11

Industry Overview…….…………………….……………………………………………………………….………….…….. ..12

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Investment Highlights

Q3 FY10 Results Update

Power Grid Corporation of India engaged in establishment, operation and maintenance of

regional and national power grids including load dispatch centers, disclosed the

following results for the quarter ended Dec. 31, 2009. On standalone basis, it has posted a

profit after tax of Rs 4,878.40 million for the quarter ended Dec. 31, 2009 as compared to

Rs 3,723.50 million for the quarter ended Dec. 31, 2008, raise of 31.02%. Net sales for the

quarter are increased by 3.25% to Rs.15254.10 million from Rs.14774.40 million for same

quarter last year. Total Income has increased 11.99% from Rs 15,626.70 million for the

quarter ended December 31, 2008 to Rs 17,500.10 million for the quarter ended

December 31, 2009. The EPS of the company is registered to Rs.1.16 for the quarter

ended December 2009.

Quarterly Results - Standalone (Rs in mn)

As At Dec-09 Dec-08 %change

Net sales 15254.10 14774.40 3.25

Net profit 4878.40 3723.50 31.02

Basic EPS 1.16 0.88 31.02

Power Grid to make Rs 1603 Cr. investment for system strengthening

Power Grid Corporation of India has approved investment for system strengthening in

various regions. Its board has approved investment for system strengthening - X in

Southern Regional Grid at an estimated cost of Rs.276.61 crores, with commissioning

schedule of within 28 months from the date of investment approval.

Further it would invest for system strengthening in Northern Region for Sasan and

Mundra Ultra Mega Power Projects at an estimated cost of Rs.1216.83 crores, with

commissioning schedule of within 32 months from the date of investment approval.

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Lastly, it approved investment Northern Region system strengthening scheme - XXIII at an

estimated cost of Rs 109.72 crores, with commissioning schedule of within 24 months

from the date of investment approval.

Dividend Declared

Power Grid Corporation of India Ltd has declared Interim Dividend Re. 0.50 per share of Rs

10/- each, i.e. 5% of Share capital.

Power Grid board to participate in JV with Nepal Electricity

Power Grid Corporation of India has approved its equity participation of 26% in the joint

venture company Power Transmission Company Nepal with Nepal Electricity Authority

and IL&FS as other partners for establishment of Dhalkebar- Bathanaha Section (Nepal

portion-about 39 kms.) of 400 KV D/C Muzaffarpur- Dhalkebar transmission line.

Further it gave investment approval for transmission system associated with Simhadri-II

Generation Project - line connecting the generation to the grid at an estimated cost of Rs

384.1 million, with commissioning schedule of within 18 months from the date of

investment approval

Power grid invest in immediate evacuation system for nabinagar TPS

Power Grid Corporation of India has accorded the investment approval for 'Immediate

evacuation System for Nabinagar TPS' (1000 MW) at an estimated cost of Rs 215.86 crore.

The commissioning schedule of the project is 28 months from the date of the investment

approval. The board has also given an in-principle approval for the 'Follow on Public Offer'

(FPO) of 10% of paid up capital from the domestic / external market for augmenting

resources of the company to fund its investment programme. The proposal will be

subject to approvals from the Government of India (GoI) and approvals, as required for

the FPO.

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Company Profile

POWERGRID, the Central Transmission Utility (CTU) of the country, is engaged in power

transmission business with the mandate for planning, co-ordination, supervision and control

over complete inter-State transmission system. POWERGRID, as on July 2009, owns and

operates about 71,600 ckt kms of transmission lines at 800/765 kV, 400 kV, 220 kV & 132 kV

EHVAC & +500 kV HVDC levels and 122 sub-stations with transformation capacity of about

81,200 MVA. This gigantic transmission network, spread over length and breadth of the

country, is consistently maintained at an availability of over 99% through deployment of state-

of-the-art Operation & Maintenance techniques which are at par with global standards. About

45% of total power generated in the country is wheeled through this transmission network

Recognizing the role of POWERGRID in the overall development of transmission and power

sector, Govt. of India has conferred Navratna upon status to POWERGRID in May` 08, the

highest honour for a Public Sector Enterprise. For overall co-ordination at national level,

POWERGRID has implemented National Load Despatch Centre (NLDC) at Delhi with back up at

Kolkata, which has been commissioned in February, 2009. NLDC shall be the apex body to

ensure integrated operation of the national power system.

POWERGRID has diversified in the following areas.

CONSULTANCY

Since 1995, POWERGRID has provided transmission-related consultancy advice to about 90

clients in India and internationally. These consultancy services include system engineering and

feasibility studies, the review of load despatch and communications systems, contract and

procurement services, turnkey execution of transmission and sub-transmission projects,

supervision of rural electrification projects, the implementation of intrastate availability-based

tariffs and the preparation of distribution code.

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TELECOMMUNICATION

POWERGRID has diversified into the telecommunication business by creating a

telecommunication network using their overhead transmission infrastructure. POWERGRID

owns and operates a fibre-optic cable network which in March 2007 consisted of over 19,000

kilometres and connected over 60 Indian cities, including all major metropolitan areas. We have

been leasing bandwidth on this network to more than 60 customers, including major telecom

operators such as Bharat Sanchar Nigam Limited, Videsh Sanchar Nigam Limited, Tata

Teleservices Limited, Reliance Communications Limited and Bharti Airtel Limited.

DISTRIBUTION AND RURAL ELECTRIFICATION

The electric power distribution system in many parts of India is in need of modernisation,

capacity expansion and sectoral reform. The Government of India has taken a number of

initiatives to improve electric power distribution in general and rural electrification in

particular. Under the APDRP ( full form), POWERGRID has been appointed as an Advisor-cum-

Consultant (“A/C”), and in that role company is consulting on and monitoring the development

of 178 electricity distribution schemes spread over 18 states, covering urban and semi-urban

areas.

Peer Group Comparison

Name of the company CMP (Rs.)

Market

Cap.(Rs.mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend(%)

Power Grid corporation 113.60 478124.22 5.01 22.65 3.53 12.00

NTPC Ltd 208.35 1717942.5 10.70 19.47 2.91 36.00

Reliance Power Ltd 146.00 349573.3 1.14 127.94 2.53 0

TATA Power 1309.00 310147.9 47.85 27.33 3.58 115.00

Key Concerns

Adverse Govt. policies.

High competition from unorganized players to some extent.

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The ongoing slow down could result in significant delays in the commitment of power

projects.

Financials Results

12 Months Ended Profit & Loss Account (Standalone)

Value(Rs.in.mn) FY08 FY09 FY10E FY11E

Description 12m 12m 12m 12m

Net Sales 46148.20 66758.50 66664.66 73997.77

Other Income 4667.10 3526.90 7123.70 7836.07

Total Income 50815.30 70285.40 73788.36 81833.84

Expenditure -10518.00 -11739.10 -11656.06 -12949.61

Operating Profit 40297.30 58546.30 62132.30 68884.23

Interest -13395.50 -25320.90 -16560.71 -17388.74

Gross profit 26901.80 33225.40 45571.59 51495.49

Deprecation -9596.50 -10939.70 -21529.58 -23682.54

Profit Before Tax 17305.30 22285.70 24042.01 27812.95

Tax -2820.60 -5379.60 -3690.27 -4589.14

Profit After Tax 14484.70 16906.10 20351.74 23223.81

Equity capital 42088.40 42088.40 42088.40 42088.40

Reserves 92985.30 104147.50 124499.24 147723.05

Face value (Rs.) 10.00 10.00 10.00 10.00

EPS 3.44 4.02 4.84 5.52

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Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs.in.mn) 30-Jun-09 30-Sep-09 31-Dec-09 31-Mar-10E

Description 3m 3m 3m 3m

Net sales 16230.30 17485.50 15254.10 17694.76

Other income 1992.90 751.10 2246.00 2133.70

Total Income 18223.20 18236.60 17500.10 19828.46

Expenditure -2917.00 -2770.80 -2783.20 -3185.06

Operating profit 15306.20 15465.80 14716.90 16643.40

Interest -3833.80 -4162.30 -4117.60 -4447.01

Gross profit 11472.40 11303.50 10599.30 12196.39

Deprecation -4670.10 -5818.50 -5359.70 -5681.28

Profit Before Tax 6802.30 5485.00 5239.60 6515.11

Tax -1336.20 -885.30 -361.20 -1107.57

Profit After Tax 5466.10 4599.70 4878.40 5407.54

Equity capital 42088.40 42088.40 42088.40 42088.40

Face value (Rs.) 10.00 10.00 10.00 10.00

EPS 1.30 1.09 1.16 1.28

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Charts:

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1 Year Comparative Graph

Outlook and Conclusion

At the current market price of Rs.113.60, the stock is trading at 23.49 x FY10E and

20.59 x FY11E respectively.

Price to Book Value of the stock is expected to be at 2.87 x and 2.52 x respectively

for FY10E and FY11E.

Earning per share (EPS) of the company for the earnings for FY10E and FY11E is seen

at Rs.4.84 and Rs.5.52 respectively.

Net Sales and PAT of the company is expected to grow at a CAGR of 17% and 17%

over 2008 to 2011E respectively.

On the basis of EV/EBITDA, the stock trades at 7.70 x for FY10E and 6.94 x for FY11E.

PGCIL has approved Rs.1603cr. investment for system strengthening in various

regions.

Power Grid Corporation of India has approved its equity participation of 26% in the

joint venture company Power Transmission Company Nepal with Nepal Electricity

Authority.

POWER GRID BSE SENSEX

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We expect that the company will keep its growth story in the coming quarters also.

We recommend ‘BUY’ in this particular scrip with a target price of Rs.131.00 for

Medium to Long term investment.

Industry Overview

Sector structure

As the Indian economy continues to surge ahead, its power sector has been expanding

concurrently to support the growth rate. The demand for power is growing exponentially and

the scope for the growth of this sector is immense. India's total installed capacity of electricity

generation has expanded from 105,045.96 MW at the end of 2001–02 to 155,859.23 MW at the

end of November 2009. In fact, India ranks sixth globally in terms of total electricity generation.

Source-wise, at the end of November 2009, thermal power plants accounted for an

overwhelming 63.92 per cent of the total installed capacity, producing 99628.48 MW. Hydel

power plants come next with an installed capacity of 36,885.40 MW, accounting for 23.67 per

cent of the total installed electricity generation capacity. Besides thermal and hydel power,

renewable energy sources contribute 9.77 per cent to the total power generation in the country

producing 15,225.35 MW. Nuclear energy makes up the balance 2.64 per cent, contributing

41,200 MW.

According to the latest data obtained from the Central Electricity Authority (CEA), while power

demand increased marginally from 108,911 Mw in the first seven months of the financial year

2007-08 to 109,304 Mw in the same period of 2008-09, it jumped to 116,281 Mw in the first

seven months of 2009-10, as industrial activity improved due to the recovery. Factories

accounted for around 30-40 per cent of the total power consumed in the country.

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Powering Up

Power demand versus deficit in Apr-Oct of last five years

Year Demand % increase in

demand Availability Deficit (%)

2005-06 88,667 NA 80,631 9.10

2006-07 98,520 11.11 84,468 12.20

2007-08 108,911 10.54 92,976 14.60

2008-09 109,304 0.36 94,566 13.50

2009-10 116,281 6.38 101,609 12.60

Source: CEA

(Figures in Mw)

Growth Potential

According to a report by KPMG and CII, released in December 2007, India's energy sector will

require an investment of around US$ 120 billion- US$ 150 billion over the next five years. The

government has revised its target of power capacity addition to 92,700 MW in the 11th Five

Year Plan (2007-12), from the earlier estimate of 78,577 MW (as of June 2007) to sustain the

growth momentum of the economy.

Further, according to Planning Commission estimates, renewable energy (RE) projects worth

US$ 16.50 billion, for the generation of 15,000 MW power, would come up in the 11th Plan.

Moreover, the government has earmarked a total capital subsidy of US$ 6.88 billion for

providing electricity connections and for the distribution of infrastructure to rural households.

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Nuclear Power Generation

Subsequent to the Indo-US nuclear deal and India getting clearance from the Nuclear Suppliers

Group (NSG), nuclear power generation is likely to provide an opportunity of US$ 10 billion in

the next five years, according to a JP Morgan estimate.

Since the Indo-US nuclear deal, India has signed a crucial civil nuclear agreement with Mongolia

for supply of uranium to New Delhi. In November 2009, the Indo-French civil nuclear agreement

was unanimously adopted by the French Parliament, paving way for companies to build nuclear

power plants in India. India has also signed a civil nuclear pact with Argentina and has reached

an agreement on civil nuclear cooperation with Canada. In December 2009, Russia and India

signed an agreement to expand nuclear cooperation.

• Hindustan Construction Company (HCC) has signed a memorandum of understanding (MoU)

with the international engineering and project management company AMEC plc, to jointly

explore the application of consulting and EPC services for the establishment of nuclear

power plants in India.

• The Central government has finalised six 1,000 MW nuclear power units at Mithivirdi in

Gujarat, involving an investment of US$ 12.8 billion.

• Indian Oil Corporation (IOC) has signed a memorandum of understanding (MoU) with the

Nuclear Power Corp of India (NPCIL) for setting up of a US$ 2.2 billion nuclear power plant.

• Larsen & Toubro (L&T) is entering a joint venture with the Nuclear Power Corporation of

India (NPCIL) to explore co-operation in the setting up of nuclear power plants.

Investments

According to research by Venture Intelligence, India’s power sector is set to emerge as a key

destination for private equity (PE) players to make investments, with close to US$ 1.64 billion

worth of infrastructure funds, mainly in power, awaiting their launch.

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• National Hydroelectric Power Corporation (NHPC), the country’s largest hydel power

producer, will develop the 1,500-MW Tipaimukh hydropower project in the north-eastern

state of Manipur at an investment of US$ 1.7 billion.

• Bhushan Power and Steel (BPSL) plans to invest US$ 629.1 million to add 250 MW capacity

to its existing power plant and to increase production of value-added steel at its Orissa

facility over the next one year.

• More than US$ 15.4 billion worth of investments have been lined up for various power

projects in Maharashtra; it was announced by Mr Subrat Ratho, Maharashtra Power

Secretary.

• A loan agreement of US$ 330 million for the Haryana Power System Improvement Project

has been signed by representatives from the Government of India, the Government of

Haryana and the World Bank.

• The Orissa government has approved two bio-mass based power projects with a combined

generating capacity of 39 MW of power, in an effort to exploit the available potential in the

bio-mass sector.

• Torrent Power Limited, has dedicated the country's biggest gas-based power project of

1,147 MW capacity near Surat and is further scaling up generation capacity of its plant by

adding another 3,400 MW in the next five years.

• The joint venture between Toshiba of Japan and the JSW Group, which is setting up a US$

215 million power plant equipment manufacturing unit in Chennai, plans to start work on

the project by December 2009.

• Larsen & Toubro has reached a milestone in the Indian power sector by establishing the

country’s largest transmission line research and testing centre at Kanchipuram, near

Chennai.

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Government Initiatives

The government has taken several proactive steps to open the sector for the private players

and realize the full potential of the country in the power sector.

• Introduction of the Electricity Act 2003 and the notification of the National Electricity and

Tariff policies.

• Constitution of Independent State Electricity Regulatory Commissions in the states.

• Allowing the private sector to set up coal, gas or liquid-based thermal projects, hydel

projects and wind or solar projects of any size.

• Allowing foreign equity participation up to 100 per cent in the power sector under the

automatic route.

• Allowing 100 per cent foreign direct investment (FDI) in the Indian power sector (except

nuclear).

• Allowing 100 per cent foreign direct investment (FDI) in the renewable energy sector.

• Providing income tax holiday for a block of 10 years in the first 15 years of operation and

waiver of capital goods' import duties on mega power projects (above 1,000 MW

generation capacity).

• The government has also taken up some ambitious programmes like the Ultra Mega Power

Projects (UMPP), Rajiv Gandhi Grameen Vidhyutikaran Yojana (RGGVY), Accelerated Rural

Electrification Programme and the goal of Power for All by 2012 among others, to rapidly

increase the installed capacity.

Looking ahead

A study by consultancy major McKinsey estimates, India's power demand to increase to 315

GW–335 GW by 2017, if India continues to grow at an average of 8 per cent in that time. This

would require a five- to ten-fold rise in power production, entailing investments worth US$ 600

billion. To fuel its rapidly growing economy, India is planning to get an additional 60,000 MW of

electricity from various hydro-power projects by the end of 2025.

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The government targets providing electricity for all by 2012. Under the Rajiv Gandhi Grameen

Vidyutikaran Yojna, the Ministry of Power plans to electrify 120,000 villages in the current Five

Year Plan (2007–12).

________________ ____ _________________________

Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation

for the purchase or sale of any financial instrument or as an official confirmation of any

transaction. The information contained herein is from publicly available data or other

sources believed to be reliable but do not represent that it is accurate or complete and it

should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s

affiliates shall not be in any way responsible for any loss or damage that may arise to any

person from any inadvertent error in the information contained in this report. This document

is provide for assistance only and is not intended to be and must not alone be taken as the

basis for an investment decision.

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