Power Grid - India Infolinecontent.indiainfoline.com/wc/research/researchreports/... ·...

Sector: Utilities

Sector view: Neutral

Sensex: 18,578

52 Week h/l (Rs): 125/94

Market cap (Rscr) : 55441

6m Avg vol (‘000Nos): 3005

Bloomberg code: PWGR IN

BSE code: 532898

NSE code: POWERGRID

FV (Rs): 10

Company rating grid

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Power Grid Sensex

Share holding pattern

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Promoters Institutions Others%

Rating: BUY Target: Rs142

CMP: Rs120

Upside: 18.3%

Company ReportOctober 18, 2012

Research Analyst: Bhavika Shinde

[email protected]

Initiating Coverage

Stable business, low volatility along with steady returns Power Grid (PWG) is a monopoly play in the regulated transmission business in India and its one of the better managed PSUs. The company is in a regulated business which assures minimum 15.5% ROE; guarantees reasonable profitability along with steady returns. Power Grid has also consistently maintained average system availability above 99.94% at par with the International utilities, thus leading to higher income under the incentive based tariff structure. PWG, Navaratna PSU, is India's Central Transmission Utility (CTU) and carries about 50% of India's generated electricity. As on 31 August 2012, it has a transmission network of about 95,846 circuit km with 157 EHVAC/HVDC substations. PWG plans Rs1,000bn of capex during the XIIth Five Year Plan (FY13‐17). For power grid the asset base increases with every tick. Additionally, PWG also provides chance to participate in power sector reforms as the company is the indirect beneficiary. Indirectly coal shortage and other issues can still impact growth, but with regulatory support like payment protection mechanism (PSDF scheme), which deals with opertionalisation of transmission project despite delay in generation project increase our confidence. The company derives 95% of revenue from transmission business, but to de‐lever its trying to diversify in broadband and telecom services and also in consultancy for T&D projects in India and abroad (overseas EPC contract worth Rs100bn to be executed). We believe EPS CAGR of 21% over FY12‐14E with an average RoE of 16% makes it one of the safe and attractive bet in troubled utility sector. But, dilution concerns and rich valuations may limit upside. We value the company on the basis of the price to book. We assign BUY rating on PWG with a 9‐month target price of Rs142. Financial summary Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E

Revenues 83,887 100,353 125,496 144,746

yoy growth (%) 25.6 19.6 25.1 15.3

Operating profit 69,439 83,824 105,661 121,936

OPM (%) 82.8 83.5 84.2 84.2

Reported PAT 26,969 32,550 41,155 47,653

yoy growth (%) 20.8 20.7 26.4 15.8

EPS (Rs) 5.8 7.0 8.9 10.3

P/E (x) 20.6 17.1 13.5 11.7

Price/Book (x) 2.6 2.4 2.1 1.9

EV/EBITDA (x) 13.4 12.6 11.2 10.6

Debt/Equity (x) 1.9 2.2 2.5 2.6

RoE (%) 14.5 14.5 16.6 17.2

RoCE (%) 9.1 9.0 9.5 9.4 Source: Company, India Infoline Research

Power Grid

Power Grid

2

Monopoly play PWG is the only listed play on the regulated transmission business in India. The company carries about 50% of India's generated electricity. Though it’s a PSU (61.42%‐owned by the Government of India), being ‘Navratna’ PSU, PWG has all the autonomy to undertake new transmission projects of any amount with the approval of its board of directors. As on 31st August 12, PWG owes and operates more than 95,846 Ckt (circuit kilometers) network of transmission lines, 1,44,303 MVA transformation capacity and 157 nos. substations that constitutes most of India’s interstate and inter‐regional electric power transmission system and carries electric power across India. PWG also has Inter‐regional power transfer capacity of ~28,000 MW. In India power transmission is the weakest link in the power chain. Infrastructure has simply not kept pace with the stunning growth in power generation capacity of 5.6% CAGR in XIth plan. We expect the gap to narrow down in the next Five Year Plan with more investment in transmission and distribution segment. PWG is the biggest player in this segment; any incremental investment will directly benefit PWG.

PWG carries about 50% of India's generated electricity PWG is the biggest player in this segment; any incremental investment will directly benefit PWG

Power generation growth (5.2% CAGR over FY01‐12) Year‐wise generation capacity addition

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(BU)

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Central State Private Total

(MW)2007‐08 2008‐09 2009‐10

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Source: Company, India Infoline Research

Growth of Substations (MVA/ MW) at the end of each Plan

Growth of the Transmission Lines (Ckm) at the end of each Plan

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765kV HVDC Bipole 400kV 220kV

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765kV HVDC Bipole 400kV 220kV


Power Grid

3

Public-Private Partnership to bridge the gap In view of rapid industrialization and the increase in power demand, many states are gearing up to set up high capacity intra‐state power transmission systems, which was being neglected due to lack of investments by the state utilities. The “PPP” (Public Private Partnership) model is being taken up by many state utilities to attract private investment in transmission sector. Private developers like Essar, Jaypee and Adani are also setting up inter‐state transmission lines.

Capacity addition during Twelve Five Year Plan (2012-17) The XIIth Five Year Plan entails capacity addition of 118 GW (30 GW of renewable energy). This would require Rs1,800bn investment in transmission (inter‐State worth Rs1,250bn and intra‐State worth Rs550bn; which would be of 109,440ckt addition and 270,000 MVA addition) and Rs3,062bn of investment in distribution (includes Rs95bn for Smart Grid and ckt addition of <33kV) 13,05,000 and MVA addn. 33/11kV of 138,000 MVA). Of Rs1,800bn investment planned in transmission segment for XIIth Plan, ~Rs1,000bn has been bagged by PWG accounting ~55% of the total investment. Investments worth Rs840bn have already been approved and orders worth Rs700bn have been placed.

Private developers like ESSAR, JAYPEE and Adani are also setting up inter‐state transmission lines

Rs1,800bn investment planned in

transmission segment for XIIth Plan;

~Rs1,000bn has been bagged by PWG

XIIth Plan capacity addition planned in generation

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Central State Private Total

(MW)Hydro Thermal Nuclear

XIIth and XIIIth Plans’ Transmission & Distribution Capex (Rsbn) XII Plan XIII Plan

Total Transmission Capex 1,800 2,300

Interstate 1,250 1,350

Already being executed by PGCIL 1,000 ‐

To be bid out/ yet To be decided 250 ‐

Intrastate 550 950

Total Distribution Capex 3,062 2,540 Source: Company, India Infoline Research


PWG’s Investment program for XIIth plan Total capital outlay of Rs1,000bn in XIIth plan

52%

14%

22%

12%

Grid Strengthening

CS Generation

UMPP

IPP

21%

20%

20%

19%

20%FY12‐13

FY13‐14

FY14‐15

FY15‐16

FY16‐17


Power Grid

4

PWG Projects; current status As on April 2012, PWG has 80 transmission projects in various stages of implementation which include 22 generation‐linked projects worth of ~Rs519bn, 33 system strengthening Projects with cost of ~Rs223bn & 25 Projects for IPPs/ LTOA with cost of approx Rs431bn. These projects involve approximately 51,523 circuit kilometers of transmission lines and 84 substations with a total power transformation capacity of approximately 159355 MVA and 10250 MW of HVDC. The total budgeted cost of these projects is Rs1173bn. The projects also include 11 High Capacity Transmission Corridors to facilitate power transfer from various upcoming IPP generation projects. Most of these generation projects are envisaged in the states of Orissa, Chhattisgarh, Jharkhand, Madhya Pradesh, Sikkim, Andhra Pradesh, Tamil Nadu etc. The transmission corridors mainly comprise high capacity 765kV double circuit line, ±800kV HVDC system, 765/400kV pooling stations at different locations. In addition, the company is also involved in development of transmission system of 6 UMPPs each of 4000MW capacity as well as other central sector generation projects and grid strengthening schemes. The transmission scheme mainly involves establishment of 765kV AC and 800kV HVDC system. It also involves development of ~50,000 Ckt EHV transmission lines at 400kV and above level and about 60 EHV substations with about 110,000 MVA transformation capacities in next 6‐7 years. Regulated equity to improve with increasing capex and its capitalisation As described above, PWG plans ~Rs1,000bn of capex during the XIIth Five Year Plan (FY13‐17). Expansion of inter‐regional power transmission system with nine high capacity power transmission corridors, strengthening of existing grids, creating a national grid and providing transmission linkage for upcoming generation capacities in the 12th Plan (118GW generation capacity addition in 12th Plan) will lead to robust growth in the power transmission sector. With the capex and capitalization trend improving, we believe regulatory asset build up to accelerate.

PWG has 80 transmission projects in various stages of implementation. The budgeted cost of these projects is ~Rs1173bn.

With the capex and capitalization trend improving, regulatory asset build up to accelerate.

Increasing trend in capitalisation Annual trend regulated equity

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Power Grid

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Annual trend in Capex Annual trend in capitalisation

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Safe bet to participate in power sector reforms We believe regulated business model makes it a safe bet in the troubled utility segment. PWG has low operational risk than generation as cost plus tariff for the projects in hand enables the company to recover its entire costs. Additionally, PWG also provides a chance to participate in power sector reforms as the company is the indirect beneficiary. Though coal shortage can impact growth in power generation and ultimately delay in transmission business. But, Regulatory support like payment protection mechanism (PSDF scheme), which deals with opertionalisation of transmission project despite delay in generation project increases our faith. IPPs also have signed Bulk Power Transmission Agreement (BPTA) and Transmission Service Agreement (TSA) with condition that if some IPPs fail/delay to execute their projects, balance IPPs shall share transmission charges. IPPs have also provided bank guarantee towards their commitment to Long Term Open Access (LTOA). Relatively immune to delay in power generation PWG will remain insulated even if there is a delay in power generation. Under payment protection mechanism, PWG has been able to recover the tariff in projects like Kudankulam, Barh‐Baliya, Koldam, Dulhasi project where the generation was delayed. Hence, we believe in future the company will not be impacted due to such delays.

Regulated business model makes it a safe bet in the troubled utility segment.

Power Grid

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Diversification; a long term strategy in place PWG has extensive experience and expertise in implementing transmission projects and has been rated consistently “EXCELLENT” by GOI MoUs since 1994. After reaching mass in its nationwide transmission system, Power Grid is now set to extract gains from the opportunity in other space. The company owns and operates a fibre‐optic cable network of 25,000 km, which connects over 110 Indian cities. Focus on other businesses is also visible in the form of overseas EPC contract worth Rs100bn and opportunity to increase revenue in telecom under Bharat Broadband Network scheme.

In Telecom space, PWG has a presence in two business activities: (a) Fibre optic business, and (b) Tower leasing business. The company leases bandwidth on this network to more than 60 customers, including major telecom operators such as BSNL, Tata Communications, Tata Teleservices, Reliance Communications and Bharti Airtel. It has a license to provide telecom services like National Long Distance (NLD), Internet Service Provider (ISP) Category‐A and Infrastructure Provider Category I (IP‐I). PWG is also partnering with the Government of India in the implementation of the National Knowledge Network project and the National Optic Fibre Network project, but the projects are still in nascent stage. The revenue from this segment has grown about ten‐fold from Rs 391mn in FY06 to Rs 2012mn in FY12 (~1.8% of the total revenue). In our estimates we are factoring in moderate revenue 20% for Telecom business over FY12‐14E.

The company is also leveraging its vast experience in transmission‐related services, by providing consultancy services to India and abroad. Consultancy business, which is ~2.7% of the total income, has grown from mere Rs 372mn in FY06 to Rs 2,900mn in FY12. Consultancy income mainly comprises fees from Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY), the execution of transmission and communication system‐related projects on a turnkey basis. As on FY12 end, PWG has 116 domestic assignments for projects worth Rs190bn and 19 international assignments for projects worth Rs105bn are under execution by PWG’s consultancy division. We are factoring in moderate revenue CAGR of 5% over FY12‐14E in our estimates.

Power Grid is now set to extract gains from the opportunity in other space. The company leases bandwidth on this network to more than 60 customers, including major telecom operators such as BSNL

Consultancy business, which is ~2.7% of the total income, has grown from mere Rs 372mn in FY06 to Rs2900mn in FY12

Consultancy revenue reported 41% CAGR in revenues over FY06‐12

Telecom business reported 31% CAGR in revenues over FY06‐12

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Power Grid

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One step closer to vertical integration; proposed JV with SEBs is beneficial Under the XIIth Plan, an investment worth Rs550bn is allocated for intra‐state transmission network. This investment will be committed by respective SEBs as PWG undertakes inter‐state power transmission projects, but intra‐state transmission projects are handled by SEBs. Considering the weak financial health of SEBs, PWG has proposed a joint venture (JV) model wherein PWG will pick up an equity stake in the JV to undertake projects jointly with SEBs. We believe this would be a significant opportunity in the intra‐state domain and will help PWG in the long run to venture in distribution segment. Open access and Smart Grid technology augurs well for PWG The power ministry operationalised the open access to consumers with a power requirement of 1MW & above in November 2011. There are three types of open access viz. Short, medium and long term. Short term tariff is decided by CERC and it’s on first come first serve basis. Medium term to long term open access tariffs are negotiated and decided by the beneficiary, generator and SEBs. In April 2012, the ministry issued directives (under Section 107 of The Electricity Act 2003) to CERC stating that the state regulators have no jurisdiction to decide energy tariff. The state regulators will only be required to calculate the cross subsidy and wheeling charges. But, the power distribution companies put off the implementation of open access due to the fear of losing key industrial customers, seeking further clarity on issues like reliability charge, separate feeders for open access consumers etc. The cross‐subsidy charges have been reduced by many states in order to increase the open access. However, its implementation is limited and depends on how state discoms act. We believe the implementation of open access system will increase incremental volume across regions and would also need infrastructure which in a way will boost PWG growth. Smart move towards Smart Grid technology The Smart Grid technology in distribution sector has been taken up for the development of pilot Smart Grid/City in Pondicherry and some parts of J&K through open collaboration. This would enable development of efficient energy system and energy conservation. It will act as a backbone to enable new business models like smart city comprising Smart Citizen Services, e‐governance, electric vehicles, etc. We believe opportunity for PWG is never ending. In order to limit regional peak power deficits, reducing T&D losses and maintaining grid discipline and supporting the upcoming generation capacity, PWG has an important role to play.

Open access system will increase incremental volume across regions

Smart grid technology; a new technology for new generation

Power Grid

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Financial Analysis Revenue growth a function of capitalisation Power Grid's net sales have witnessed a compounded annual growth rate (CAGR) of 21% over the last six years to Rs107bn in FY12 and the profit after tax has recorded a CAGR of 18% over the same period to Rs32.5bn in FY12. The company is in regulated business where the returns are dependent upon the capex and ultimately on the capitalisation. Hence, the company's earnings growth will depend on how much capital expenditure it does and how fast it can capitalise its capital expenditure (ultimately commercialization of the asset). PWG starts generating income in respect of a transmission project after the completion of the project. At any point in time, the company has several ongoing transmission projects with different project completion schedules. As a result, the completion of one or more projects in a particular quarter or year could increase income. Current trend of increase in CWIP vs. capitalisation had been encouraging. We expect higher capitalisation with minimal increase in CWIP in next two years.

Earnings growth will depend on how much capital expenditure it does and how fast it can capitalise its capital expenditure

Segment‐wise revenue break‐up Trend in capitalisation

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(Rs mn)Telecom

Consultancy

Transmission Charges

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Capex v/s Capitalisation Net block v/s CWIP

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Power Grid

9

Availability and reliability at par with international players

Growth in debtors outstanding moderates

99.3%

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Improvement in operating margin Improvement in RoNW

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Improvement across the board Operational performance has improved under the new management. Availability has improved yoy to 99.94% in FY12 vs. 99.8% in FY11 and system reliability has also improved sharply. In July 2012, India faced largest power outage in history. Though it was a black mark on the company, PWG managed to restore the supply in 7‐8 hours which is again quickest in history.

The company’s debtor days also improved significantly in FY12, to 85 days from 137 in FY11. Collection from debtors improved due to factors like approval of pending tariff by the regulator and improvement in the payment cycle of SEBs. Except for SEBs of Uttar Pradesh, Rajasthan and Delhi all are paying on time. With the SEB restructuring, we believe the debtor days will improve further.

Lack of volatility in return The company's major cost is capital expenditure on setting up transmission lines, while there is hardly any operational cost. As a result it has an operating margin as high as 85%. Diversification had lead to lower operating margin but now improvement is noticeable. We also expect improvement in return ratios with higher capitalisation rate.

Availability has improved yoy to 99.94% vs 99.8%

The company’s debtor days also improved significantly in FY12, to 85 days from 137 in FY11

Power Grid

10

Moderate Improvement in RoCE is expected Improvement in ROA noticeable

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High capex requirement; slippage in capitalization can lead to dilution Being in a high capex industry, the debt requirement is huge for the company. The projects are funded by 70% debt and 30% equity. PWG plans ~Rs1000bn of capex during the XIIth Five Year Plan (FY13‐17). The company has already tied up for loans and is confident about funding the equity portion through internal accruals. Dilution risk increases if slippages happen in capitalisation. Management is however, confident of more than 90% capitalisation and if needed the company would raise debt (80:20 proportion). XIIth Plan Investment

Investment (Rs mn) FY13 FY14 FY15 FY16 FY17 Total

Capex 200,000 190,000 200,000 200,000 210,000 1,000,000

Debt Requirement 140,000 133,000 140,000 140,000 147,000 700,000

Already Tied Up 80,000 52,000 36,000 28,000 24,000 220,000

Domestic 50,000 10,000 10,000 10,000 0 80,000

Foreign 30,000 42,000 26,000 18,000 24,000 140,000

Balance to be tied up 60,000 81,000 104,000 112,000 123,000 480,000Source: Company, India Infoline Research

Debt Schedule as on July 2012

Debt Schedule (Rs mn) FY13 FY14 FY15 FY16Beyond

FY16 Total

Rupee Loans

Bonds 15,401.1 19,337.2 24,643.4 27,917.1 2,62,537.5 3,49,836.3

Other Domestic Loans 1,773.0 1,181.8 1,033.7 1,017.3 10,002.2 15,008.0

Foreign Currency Loans

US$ 7,009.6 8,180.6 9,730.5 9,777.4 1,06,629.8 1,41,327.9

EUR 270.3 281.0 83.9 83.9 1,261.5 1,980.6

SEK 206.3 206.3 206.3 206.3 4,441.7 5,266.9

CHF 1,582.2 791.1 ‐ ‐ ‐ 2,373.3

JPY 115.1 115.1 115.1 115.1 1,265.7 1,726.1

TOTAL 26,357.6 30,093.1 35,812.9 39,117.1 3,86,138.4 5,17,519.1Source: Company, India Infoline Research

PWG plans ~Rs1000bn of capex during the XIIth Five Year Plan (FY13‐17). The projects are funded by 70% debt and 30% equity.

Power Grid

11

Valuations Power Grid has a safe and stable business model with low volatility and steady returns. We believe scarcity value (being a monopoly play in transmission business) along with attractive growth and indirect beneficiary of the power sector reforms makes PWG one the best picks in the troubled utility space.

The company's business model, which ensures a 15.5% return on equity (RoE) (at least till 2014) on investment, ensures consistent revenue flow. Power Grid has maintained average system availability above 99%, thus leading to higher income even under the incentive‐based tariff structure. We are comfortable in stating Power Grid is one of the best managed PSUs in India. At current market price of Rs 120, the stock is trading at 12 times its FY14 estimated earnings of Rs10.3. We value the company on the basis of the price to book. Currently the stock is trading at 10% discount to 5 years mean P/B of 2.2x. We expect valuations to catch up with increasing capex and capitalisation of assets. We assign BUY rating on PWG with a 9‐month target price of Rs142.

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1 Year forward P/B Trading at 10% discount to 5 years mean P/B of 2.2x

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Key Risks Revenue collection risk PWG derives most of the revenues (90%) from transmission of power to the State Power Utilities (SPUs) and many of these entities have weak credit histories. The SPUs include certain SEBs and also the entities that have been created by the unbundling of the remaining SEBs. Hence revenue collection risk along with bulging of debtors remains a key concern. However, agreements with the SPUs are backed by letters of credit that typically cover 105% of the SPUs’ preceding twelve months average billing. Delay in transmission projects can lead to liquidity burden and ultimately increases dilution risk Delay in award of projects to competent contractors on a timely basis, or on terms that provide for the timely and cost‐effective execution of the project can result in lower capitalization. Further, projects may be delayed and returns on those projects may also be affected. Also, flexibility in managing operations is limited by the regulatory environment. Tariffs could be modified in the future in ways that could have an adverse effect For PWG, current tariffs to remain in force till March 31, 2014. The tariffs for transmission projects are determined by the Central Electricity Regulatory Commission (CERC), pursuant to the Electricity Act 2003 and CERC regulations. The current CERC regulations are the CERC (Terms and Conditions of Tariff) Regulations, 2009, (Fiscal 2010‐ 2014 Regulations), which are based on a cost‐plus‐tariff based system and provide a return on equity on pre‐tax basis at a base rate of 15.5%, to be grossed up by the normal tax rate as applicable for the respective year. Reducing return on equity from 15.5% to lower level and reducing incentive scheme will impact returns negatively. In the past, CERC decreased the company’s return on equity from 16% to 14% during the period April 1, 2004 to March 31, 2009. Even if the projects are not completed on time, it changes the rate of recovery of operation and maintenance expenditure as incentives get hampered. Recovery of operating and maintenance expenses under tariffs may not fully compensate PWG Under the tariffs, PWG receive reimbursements for operating and maintenance expenses at normative rates, rather than actual rates. As a result, if actual operating and maintenance expenses exceed the reimbursements, profit will be reduced by the shortfall amount.

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Company Background PWG (61.42%‐owned by the Government of India) is India's Central Transmission Utility (CTU) mandated to establish and operate regional and national grids to facilitate transfer of power within and across regions. It commenced operations in April 1989 and carries about 50% of India's generated electricity. PWG also plays an active role in distribution sector reforms initiated by government. PWG has also diversified to provide broadband telecom services and consultancy for T&D projects in India and abroad. It’s the third‐largest transmission utility in the world. Business Structure PWGD is the India’s principal electric power transmission company. The company own and operate more than 95% of India’s interstate and inter‐regional electric power transmission system (ISTS). Power Grid has the statutory role of Central Transmission Utility. As CTU, PWGD operates and are responsible for the planning and development of the country’s nationwide power transmission network, including interstate networks. It is also required to facilitate non discriminatory open access to available capacity in the ISTS. A crucial aspect of the operation of an electric power system is management of the power flow in real time with reliability and security on a sound commercial and economic basis. In India we have Regional Load Despatch Centres (RLDCs) in each of the five regions. Power Grid worked as a RLDC operator. In fiscal 2009, the National Load Dispatch Centre (NLDC) was established. The NLDC is responsible for monitoring the operations and grid security of the national grid and supervises the scheduling and dispatch of electricity over inter‐regional lines in coordination with the RLDCs. All bilateral transactions are undertaken through the RLDCs, while transactions facilitated by the power exchanges are undertaken by NLDC. Power System Operation Corporation Limited (POSOCO), a wholly‐owned subsidiary of PWG was established in March 2009 to oversee the grid management function of the RLDCs and NLDC. To diversify, PWG opened its consultancy division (since 1995) which provides transmission related consultancy services to over 115 clients in over 330 domestic and international projects. It also diversified into the telecommunications business in 2001, utilizing nationwide transmission system to create an overhead fibre‐optic telecommunication cable network using optical ground wire on power transmission lines. The company leases bandwidth on this network to more than 70 customers, including Bharti Airtel, Bharat Sanchar Nigam Limited, National Informatics Centre, Dishnet Wireless Limited, and Tata Communications Limited. The company has received the following licenses to provide telecommunication infrastructure services: Infrastructure Provider Category ‐ I to construct infrastructure assets like

dark fibre, right of way, duct space & towers and Internet Service Provider

Category A license to provide internet services and a National Long Distance license to provide end to end bandwidth services

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Landmark events in Transmission Sector 1948 Electricity (Supply) Act 1948. The Act provided for establishment of the Central Electricity Authority (CEA) and the State Electricity Boards

1950‐60 Growth of State Grids and introduction of 220kV voltage level

1964 Constitution of Regional Electricity Boards

1965‐73 Interconnecting State Grids to form Regional Grid systems

1977 Introduction of 400kV voltage level

1980‐88 Growth of Regional Grid Systems as associated transmission system with Central Sector generation

1989 HVDC back‐to‐back System

1990 Introduction of HVDC bi‐pole line

1997 Synchronous inter‐connection of ER and NER

1999 Transmission planning re‐oriented towards all‐India system

2000 Introduction of 765kV transmission line (initially charged at 400kV)

2003 ‐ Electricity Act 2003 ABT with real time settlement mechanism implemented in ALL the five electrical regions creating the basic infrastructure for the operation of an electricity market. Synchronous inter‐connection of WR with ER‐NER system Bulk inter‐regional HVDC transmission system

2004 Open access in transmission

2006 Synchronous inter‐connection of NR with ER‐NER‐WR system

2007 765kV operation of Sipat Substation

2007 765kV operation of 765kV transmission lines

2010 Notification of POSOCO – for operation of RLDCs/NLDC as a separate organization form CTU

2011 Implementation of point‐of‐connection based method for sharing transmission charges and losses all across the country

Source: Draft National Electricity Plan

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Financials Income statement Y/e 31 Mar (Rs mn) FY11 FY12 FY13E FY14E

Revenue 83,887 100,353 125,496 144,746

Operating profit 69,439 83,824 105,661 121,936

Depreciation (21,994) (25,725) (29,647) (32,124)

Interest expense (16,254) (19,433) (25,920) (30,960)

Other income 7,101 7,497 7,872 8,265

Profit before tax 38,291 46,163 57,965 67,116

Taxes (11,278) (13,427) (16,810) (19,464)

Minorities and others (44) (187) ‐ ‐

Adj. profit 26,969 32,550 41,155 47,653

Net profit 26,969 32,550 41,155 47,653

Balance sheet Y/e 31 Mar (Rs mn) FY11 FY12 FY13E FY14E

Equity capital 46,297 46,297 46,297 46,297

Reserves 167,373 188,581 215,401 246,457

Net worth 213,670 234,878 261,699 292,754

Debt 414,925 522,009 648,009 774,009 Deferred tax liab & others 34,825 43,772 48,988 55,029

Total liabilities 663,420 800,659 958,696 1,121,792

Fixed assets 372,240 476,623 620,623 735,373 CWIP and Construction stores 237,129 281,835 317,835 362,835

Investments 13,984 12,845 12,845 12,845

Other long term assets & reserves 39,443 69,314 69,314 69,314

Net working capital (36,176) (63,328) (80,196) (94,259)

Inventories 3,815 4,403 5,196 6,079

Sundry debtors 11,140 23,154 28,942 33,283

Other current assets 42,664 30,618 34,755 39,596

Sundry creditors (65,041) (86,643) (108,304) (125,091)Other current liabilities (28,755) (34,859) (40,785) (48,126)

Cash 36,801 23,369 18,275 35,684

Total assets 663,420 800,659 958,696 1,121,792

Cash flow statement Y/e 31 Mar (Rs mn) FY11 FY12 FY13E FY14E

Profit before tax 38,291 46,163 57,965 67,116

Depreciation 21,994 25,725 29,647 32,124

Tax paid (11,278) (13,427) (16,810) (19,464)

Working capital ∆ (1,256) 27,151 16,869 14,063

Other operating items

Operating cashflow 47,751 85,613 87,671 93,840

Capital expenditure (106,529) (174,815) (209,647) (191,874)

Free cash flow (58,778) (89,202) (121,976) (98,034)

Equity raised 36,708 (3) ‐ ‐

Investments 549 1,139 ‐ ‐

Debt financing/disposal 70,757 107,085 126,000 126,000

Dividends paid (9,426) (11,339) (14,334) (16,597)

Other items (35,785) (21,112) 5,217 6,040

Net ∆ in cash 4,024 (13,432) (5,094) 17,409

Key ratios Y/e 31 Mar FY11 FY12 FY13E FY14E

Growth matrix (%)

Revenue growth 25.6 19.6 25.1 15.3

Op profit growth 17.8 20.7 26.1 15.4

EBIT growth 25.0 20.3 27.9 16.9

Net profit growth 20.8 20.7 26.4 15.8

Profitability ratios (%)

OPM 82.8 83.5 84.2 84.2

EBIT margin 65.0 65.4 66.8 67.8

Net profit margin 32.1 32.4 32.8 32.9

RoCE 9.1 9.0 9.5 9.4

RoNW 14.5 14.5 16.6 17.2

RoA 3.9 3.9 4.1 4.0

Per share ratios

EPS 5.8 7.0 8.9 10.3

Dividend per share 1.8 2.1 2.7 3.1

Cash EPS 10.6 12.6 15.3 17.2

Book value per share 46.2 50.7 56.5 63.2

Valuation ratios (x)

P/E 20.6 17.1 13.5 11.7

P/CEPS 15.8 13.3 10.9 9.7

P/B 2.6 2.4 2.1 1.9

EV/EBIDTA 13.4 12.6 11.2 10.6

Payout (%)

Dividend payout 34.9 34.8 34.8 34.8

Tax payout 29.5 29.1 29.0 29.0

Liquidity ratios

Debtor days 48 84 84 84

Inventory days 17 16 15 15

Creditor days 283 315 315 315

Leverage ratios

Interest coverage 3.4 3.4 3.2 3.2

Net debt / equity 1.8 2.1 2.4 2.5

Net debt / op. profit 5.4 5.9 6.0 6.1

Du-Pont Analysis Y/e 31 Mar FY11 FY12 FY13E FY14E

Tax burden (x) 0.70 0.71 0.71 0.71

Interest burden (x) 0.70 0.70 0.69 0.68

EBIT margin (x) 0.65 0.65 0.67 0.68

Asset turnover (x) 0.12 0.12 0.12 0.12

Financial leverage (x) 3.73 3.74 4.09 4.33

RoE (%) 14.5 14.5 16.6 17.2

Recommendation parameters for fundamental reports:

Buy – Absolute return of over +10%

Market Performer – Absolute return between ‐10% to +10%

Sell – Absolute return below ‐10%

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