Power Grid Corporation of India Ltd.

Fundamental Report

Powering India, Powering Transmission July 20, 2009

Research Report: FS0907/01 Recommendation: Buy/Hold

Company Snapshot

Current Market Price: 111.70 Power Grid Corporation of India, a Navratna Public Sector Enterprise, is
one of the largest transmission utilities in the world. The company wheels
Target Price: 128/150
about 45% of the total power generated in the country on its transmission
network. It has a pan India presence with around 69,480 Circuit Kms of
Transmission network and 116 nos. of EHVAC & HVDC sub stations with a
total transformation capacity of 77,217 MVA. It has also diversified into
Telecom business and established a telecom network of more than 19,000
Kms across the country. The company has consistently maintained the
transmission system availability at 99.65% which is at par with the
International Utilities.

Q4FY09 Performance Highlights

Rs Million

Particulars Q4FY08 Q4FY09 Q3FY09

Sales 15591.80 22498.90 14774.40
Operating Profits 12126.40 18386.30 12217.40
PAT 4178.20 6330.10 3671.40
OP Margin 77.77 81.72 82.69
PAT Margin 26.80 28.14 24.85
EPS 0.99 1.50 0.87
CEPS 1.60 2.17 1.52

The company posted financial figures for the quarter ended March 2009
more than expectations. The net sale for the company is up by 44.30% to
Rs 22498.90 million for the Q4FY09 as against the net sales of Rs
15591.80 million for the Q4FY08. The company posted the operating
profits of Rs 18386.30 million for the Q4FY09 as against the operating
profits of Rs 12126.40 million for the Q4FY08 with the growth rate of
51.62%. The operating profit margin for the company stood at 81.72% for
the Q4FY09 as against the operating profit margin of 77.77% for the
Q4FY08. The net profit for the company stood at Rs 6330.10 million for
the Q4FY09 in comparison to net profit of Rs 4178.20 million for the
Q4FY08. The net profit margin of the company was 28.14 for the Q4FY09
in comparison to 26.80 for the Q4FY08. The EPS for the company stood at
Rs 1.50 for the quarter ended in March 09 as against the EPS of 0.99 for
the quarter ended March 08. The cash EPS for the company stood at Rs
2.17 for Q4FY09. The EPS for the full year stood at Rs 4.02 for the
company.
 Be Wealthy, Be Wise
Power Grid to invest Rs.
10,000 Cr to establish
transmission system.
Power Grid Corp looking for
partners to enter in US.
Power Grid wins transmission
project worth Rs. 1,033 crore.
© Focus Shares & Securities Pvt. Ltd.
Power Grid Corporation of India Ltd.
Other Developments

During the FY 09, the unutilized amount of Rs. 880 crores outstanding as
31st March, 2008 out of IPO has been utilized for the capex on the
projects specified in the offer document.
The Company has set a wholly owned subsidiary on 20th March, 2009
namely “Power System Operation Corporation”.
Business Details
Power Grid Corporation of India (POWERGRID) was incorporated on
October 23, 1989 and was mandated with the establishment, operation
and maintenance of regional & national power grids including load
dispatch centres. POWERGRID started commercial operation in 1992
when it got its current name. The Government of India (GOI) has notified
the company as a central transmission utility (CTU). Ever since its
inception in 1992, It has established a transmission network of about
69,480 circuit kms and 116 sub stations having more than 77,217 MVA
transformation capacity. At the beginning of its commercial business, the
initial network was only 22,220 circuit kms and 42 substations with
transformation capacity of 12,200 MVA. The consultancy division provides
transmission-related consultancy services to more than 90 clients in over
200 domestic and international projects. Based on its impeccable
performance in a short span of time, The Company was recognized as the
Mini Ratna Category–I PSU by GoI w.e.f. Oct’98. The company has
achieved many milestones & established benchmarks in various areas of
its business operations and now plays a strategic role in the Indian Power
Sector in establishing & maintaining the transmission infrastructure.
Recognising POWERGRID’s sterling performance, the Government of
India conferred the status of “Navratna” to POWERGRID w.e.f 1st May,
2008.
Industry Outlook
Measures announced by the new government in its Budget report for
2009-10 for the power sector, will give a thrust to investments in the
power industry. Companies from all segments of power industry would
reap benefit from those measures. Relating to power sector, the Union
Budget mentions increasing investment in infrastructure to above 9% of
GDP by 2014. The Accelerated Power Development and Reforms Program
(APDRP), which is aimed to increase reliability and quality of power
supply has got increased budget allocation to Rs 2,080 crore for 2009-10
from Rs.800 crore for 2008-09. The Rajiv Gandhi Grameen Vidyutikaran
Yojana (RGGVY), launched by the Central Government in 2005 to provide
67, Rajgir Chambers, 8th Floor, Shahid Bhagat Sing Marg, Fort Mumbai – 400 023
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 Be Wealthy, Be Wise
Past Price movement of the stock
Power Grid ties up with
KEMA to lay transmission
system.
The company has targeted a
capex of 55000 crore.
© Focus Shares & Securities Pvt. Ltd.
Power Grid Corporation of India Ltd.
access to electricity to all household in India by 2012, has received
budget allocation to Rs 7,000 crore for 2009-10 from Rs 5,500 crore for
2008-09. Budgetary allocation for RGGVY is expected to accelerate the
rural electrification, wherein power distribution and distribution
equipment players in the industry will gain momentum. The investment
climate is extremely positive for the sector due to prevailing shortages,
clarity on legal and regulatory issues and emphasis laid by the
government to improve transmission and distribution system. The sector
is attractive for all segments – generation, transmission, distribution and
equipment manufacturers. Power Grid, the only transmission company in
the country, is set to benefit significantly from this scenario.
Investment Rationale
Power Grid Corporation of India (PGCI) will invest Rs.10,000 crore to
establish a transmission system to evacuate power from Krishnapatnam
ultra-mega power project and provide open-access system to Independ-
ent Power Producers (IPPs) for the purpose of inter-State transmission.
The Krishnapatnam project and the requirement of IPPs will cost
Rs.5,000 crore each. Power Grid Corp. of India Ltd is in talks with an US
firm to jointly bid for transmission projects in the US. The company is
also in talks with Indian firm Kalpataru Power Transmission Ltd for the
partnership in the USmarket. PowerGrid Corporation of India won Rs.
1,033 crore transmission pro-ject from Punjab State Electricity Board.
The company has signed a bilateral agreement with PSEB for turnkey
execution of 400 circuit Kms of 400 kV D/C transmission lines and four
400 kV/220kV sub stations at an estimated cost of Rs. 1,033 crore,
furthermore, "The project would be completed in phases from October
2011 to February 2012. As per the agreement, the company will execute
three 400kV/220kV sub stations at Muktsar, Makhu, Nakodar and another
2X500/3X315MVA sub station at Dhuri for evacuation of Power from
PSEB's Talwandi Sabo thermal power station." The work includes design,
engineering, tendering, and evaluation, and procurement, supervision of
erection, project management and testing and commissioning of the
project. Power Grid Corporation has entered a joint venture agreement
with KEMA, with a view to lay transmission system in Middle East. It will
invest Rs. 55,000 crore to set up a national grid with the inter-regional
transmission capacity of 37,000 mw in the country. KEMA has under-
taken similar projects in various parts of the globe. Its first time that the
company has joined hands with KEMA to participate in the consultancy
and project development assignment in Middle East. The due will de-sign
the transmission system and also prepared to carry out its maintenance.
The company has targeted a capex of Rs. 55,000 crore during the XI Plan
period. It expects to invest about Rs. 11,500 crore during 2009-10. This
will be stepped up to Rs. 14,000-15,000 crore by the end of the XI Plan.
67, Rajgir Chambers, 8th Floor, Shahid Bhagat Sing Marg, Fort Mumbai – 400 023
Tel +91-22-67474300-01 Fax +91-22-22641345 Website: www.focuscomtrade.com
 Be Wealthy, Be Wise Power Grid Corporation of India Ltd.
PGCIL expects to invest up to Rs. 5,000 crore for Krishnapatnam ultra
mega power projects (UMPP) and another Rs. 5,000 crore for
transmission for independent power producers (IPPs) in Andhra Pradesh.
Of the nine IPP applicants for open access system, five have been
cleared.

Plan for FY 10

Capex for FY 10 is expected to be Rs. 12000-12500 crores for capacity

expansion.

The company will issue bonds worth up to Rs 6,000 crore ($1.2 billion) in
two instalments, the first of which is expected to hit the market by
September. The second spell of bonds will be issued 4-5 months after the
first.

The bond will have a tenure of 16 years and is expected to carry a

coupon rate of about 9%.

Standalone Financial Matrix

Rs. Million

Particulars FY06 FY07 FY08 FY09

Net sales 31453.40 35898.50 47024.70 66758.50
Growth% ----- 14.13 30.99 41.96
Expenditure 6935.40 6564.30 11194.40 12602.20
EBITDA 24518.00 29334.20 35830.30 54156.30
Growth% ----- 19.64 22.15 51.15
EBITDA margin 77.95 81.71 76.19 81.12
Other income 3410.40 3738.70 3706.70 3526.90
Depreciation 7443.30 8275.80 9596.50 10939.70
EBIT 20485.10 24797.10 29940.50 46743.50
Interest 9474.50 11404.20 12719.10 24457.80
PBT 11010.60 13392.90 17221.40 22285.70
Tax 1600.60 2526.30 2820.60 5379.60
Adjusted PAT 9410.00 10866.60 14400.80 16906.10
Growth % ----- 15.48 32.52 17.40
Net Profit margins 29.92 30.27 30.62 25.32
Extra ordinary items 679.30 1427.10 83.90 0.00
Reported PAT 10089.30 12293.70 14484.70 16906.10
Equity Capital 35846.30 37874.10 42088.40 42088.40
EPS 2.63 2.87 3.42 4.02
CEPS 4.70 5.05 5.70 6.62
ROE 9.44 10.19 10.66 11.56

67, Rajgir Chambers, 8th Floor, Shahid Bhagat Sing Marg, Fort Mumbai – 400 023
© Focus Shares & Securities Pvt. Ltd. Tel +91-22-67474300-01 Fax +91-22-22641345 Website: www.focuscomtrade.com
 Be Wealthy, Be Wise Power Grid Corporation of India Ltd.

Risk and Concern

Financing of the project:

The projects of the company are highly capital intensive so the financing of
the projects is an important concern. The company plans to almost triple
the inter region transmission capacity which requires extensive financing.

Delay of the projects:

The project delay will affect the capex plan of the company.

Valuation

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. Overall ROE to improve significantly in the next 4-5
years. During FY09, the company has reported a return on equity (ROE) of
11.56%. Further, we expect the company to continue generating incentive
income, which would lead a higher effective ROE on the transmission
projects. Higher budgetary allocations for rural transmission and the
company’s diversification into telecom connectivity, consultancy and leasing,
also provide scope for higher returns. Company’s long term prospectus are
very bright as 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. Power Grid, the only transmission company in the country, is
set to benefit significantly from this scenario.

The stock at the current market price of Rs 111.70 will trade 27.79 times to
its earnings of Rs 4.02 and 3.22 times to its book value of Rs 34.74 and is
expected to provide huge upside potential in medium to long – term.

We initiate a ‘BUY’ signal on the stock at the current levels with a target of
Rs 150 in the medium term investment horizon (6- 12 months) with an
appreciation of more than 30%.

67, Rajgir Chambers, 8th Floor, Shahid Bhagat Sing Marg, Fort Mumbai – 400 023
© Focus Shares & Securities Pvt. Ltd. Tel +91-22-67474300-01 Fax +91-22-22641345 Website: www.focuscomtrade.com
 Be Wealthy, Be Wise Power Grid Corporation of India Ltd.

Research Team

Mr. Rahul Bhandawat (Jain)

Manager-Equity Research
rahul@profitbulls.com

Mr. Varun Taparia

Fundamental Analyst – Equity
varun@profitbulls.com

Mr. Sunil Rokade

Commodity Research Analyst
sunil@profitbulls.com

Contact us: +91-22-67474310 Visit us: www.focuscomtrade.com

Prepared By:

Rahul Bhandawat (Jain)

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67, Rajgir Chambers, 8th Floor, Shahid Bhagat Sing Marg, Fort Mumbai – 400 023
© Focus Shares & Securities Pvt. Ltd. Tel +91-22-67474300-01 Fax +91-22-22641345 Website: www.focuscomtrade.com