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RESULTS REVIEW 4QFY16 30 MAY 2016

Power Grid CorporationBUY

Visible growth = Visible valuePGCILs 4QFY16 APAT at Rs 15.3bn (11% YoY

growth) was marginally below estimates, led by

higher interest expenses (higher-than-estimated

debt). Capitalisation of Rs 318bn for FY16 was a

positive surprise (the management indicated Rs

303bn earlier). The key takeaway of the analyst

meet was a roadmap for capex and capitalisation.

An average annual capitalisation of ~Rs 300bn is

likely to continue over the next four years. This

provides visibility of healthy earnings growth overthe next five years and addresses any concerns

related to significant tapering of earnings growth.

Maintain BUY with a revised TP of Rs 179 1.7x P/B

of FY18E).

Thrust on capitalisation to continue: The

management guided for capex and capitalisation

of Rs 225bn and Rs 310bn for FY17E. As on 1-

Apr-16, PGCIL had projects worth ~Rs 1,440bn in

hand, which are likely to be commissioned in thenext four years. Any further work that PGCIL gets

either though nomination or TBCB (tariff-based

competitive bidding route) will be over and

above this.

Maintain Buy:We revise our estimates to factor

in (1) Capitalisation of Rs 300/280bn for

FY17/18E each (earlier estimated at Rs

280/225bn for FY17/18E) and (2) Trends from

4QFY16 results. Our revised TP is Rs 179 (1.7x

P/B of FY18E). Currently trading at 1.4x P/B of

FY18E, PGCIL deserves a better valuation given

its (1) Scarcity value (only play on thetransmission business with regulated RoE fixed

till FY19), (2) Government-driven capex aligned

with power infra build-out, and (3) High visibility

of earnings growth (EPS growth of 24/18% for

FY17/18E), along with healthy financials and

improving RoE (4) In an environment of easing

interest rates, PGCILs assured RoE business

model with cost pass through is compelling.

Near-term outlook: We expect strong earnings

growth momentum to continue in 1QFY17

supported by healthy capitalisation in 2HFY16.

FinancialSummary

Year Ending March (Rs bn) 4QFY16 4QFY15 YoY (%) 3QFY16 QoQ (%) FY15 FY16P FY17E FY18E

Net Sales 57.60 47.03 22 54.07 7 171.77 208.02 261.38 304.09

EBITDA 51.41 3.97 0 47.97 7 147.98 182.81 230.37 266.97

APAT 16.47 13.88 19 16.14 2 49.50 60.91 75.38 88.79

Diluted EPS (Rs) 3.15 2.65 19 3.09 2 9.46 11.6 14.4 17.0

P/E (x) 15.9 12.9 10.5 8.9

P/B(x) 2.1 1.8 1.6 1.4RoE 13.6 15.1 16.5 17.1

Source: Company, HDFC sec Inst Research

INDUSTRY POWER

CMP(As on 27 May 16) Rs 151

Target Price Rs 179

Nifty 8,157

Sensex 26,654

KEY STOCK DATA

Bloomberg PWGR IN

No. of Shares (mn) 5,232

MCap (Rs bn) / ($ mn) 789/11,771

6m avg traded value (Rs mn) 633

STOCK PERFORMANCE (%)

52 Week high / low Rs 152/121

3M 6M 12M

Absolute (%) 12.9 13.0 5.3

Relative (%) (2.2) 11.0 8.6

SHAREHOLDING PATTERN (%)

Promoters 57.90

FIs & Local MFs 8.92

FIIs 25.68

Public & Others 7.50

Source : BSE

Maulik [email protected]

+91-22-6171-7325HDFC securities Institutional Research is also available on Bloomberg HSLB

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PGCIL : RESULTS REVIEW 4QFY16

Analyst meet key takeaways

Improved outlook for capitalisation: The

management highlighted a roadmap for capex

and capitalisation. PGCIL confirmed work in hand

of Rs 1,440bn as on 1-Apr-16, which may be

commissioned in the next four years. Thus, the

trend of average annual capitalisation of Rs 30bn

is likely to continue going forward.

Work In Hand

(Rs bn) Value

Ongoing Projects 940

New Projects 340

TBCB Projects 160

Total 1,440Source: Company

North East-Agra HVDC project update: PGCIL has

started receiving money from SEBs for its North

East-Agra HVDC project post-CERCs order in

Mar-16. CERC has approved provisional tariff for

FY16 and FY17 based on 65% of the project cost.

First phase of Champa-Kurukshetra line (~Rs

65bn) is likely be commissioned by Aug-16.

Update on TBCB projects: First line of PGCILs

TBCB project 400kv D/C Khammam-

Nagarjunasagar has been successfully

commissioned in 3QFY16. Overall, PGCIL has Rs

160bn of TBCB projects. Given it existing

workload, new projects are selected based on

the managements confidence of whether they

can be completed on time or not. Further, PGCIL

has flexibility to avail higher debt for TBCBprojects. PGCIL makes 15.5% RoE on any

regulated project. If one includes construction

period, equity IRR usually comes at ~13.5%. The

management is confident that PGCILs IRR for

TBCB projects will not be lower than this level.

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Quarterly Financials: Snapshot

(Rs mn) 4QFY16 4QFY15 YoY (%) 3QFY16 QoQ (%)

Net Sales 57,601 47,032 22 54,066 7

Transmission Expenses 4,648 3,880 3,651

Employee And Other Expenses 2,665 2,815 2,449

EBITDA 50,288 40,337 25 47,966 5

Interest Cost 14,773 10,375 12,875

Depreciation 17,847 14,181 15,805

Other Income 2,014 2,063 (2) 983 105

PBT 19,681 17,845 20,268

Tax 4,341 3,966 4,127

Reported PAT 15,991 14,126 13 16,131 (1)

E/o items (651) (247) 10

Adj. PAT 15,340 13,879 11 16,141 (5)


Margin Analysis

4QFY16 4QFY15 YoY (bps) 3QFY16 QoQ (bps)

Material Expenses As % Of Net Sales 8.1 8.2 -18 6.8 132

Employee Expenses As % Of Net Sales 4.6 6.0 -136 4.5 10

Operating Margin (%) 87.3 85.8 154 88.7 -141

Net Profit Margin (%) 27.8 30.0 -227 29.8 -208


Segmental Quarterly Performance

(Rs mn) 4QFY16 4QFY15 YoY (%) 3QFY16 QoQ (%) FY16 FY15 YoY (%)

Segmental Revenues

- Transmission 56,050 45,586 23 52,445 7 201,831 167,424 21

- Consultancy 1,674 1,544 8 1,153 45 4,733 3,877 22- Telecom 1,167 884 32 1,137 3 4,359 3,010 45

Total (After Deducting Inter-segment Revenue) 58,774 47,922 23 54,626 8 210,497 174,067 21

Segmental EBIT

- Transmission 32,816 25,794 27 31,396 5 119,190 95,792 24

- Consultancy 1,325 1,178 12 773 71 3,406 2,528 35

- Telecom 244 322 (24) 542 (55) 1,626 633 157

Total 34,385 27,294 26 32,711 5 124,221 98,954 26

Segmental Margins (EBIT) (%)

- Transmission 58.5 56.6 196 59.9 (132) 59.1 57.2 184

- Consultancy 79.1 76.3 281 67.1 1,203 71.9 65.2 674

- Telecom 20.9 36.4 (1,547) 47.7 (2,673) 37.3 21.0 1,625


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Projects To Be Commissioned in FY17

Source: Company

Change In Estimates

(Rs bn)Old New Change

FY17E FY18E FY17E FY18E FY17E FY18E

Capex 225 225 225 230 0% 2%

Capitalisation 280 225 300 280 7% 24%

Revenue 257 295 261 304 2% 3%

EBITDA 226 259 230 267 2% 3%

PAT 75 87 75 89 0% 2%

BVPS 91 103 93 106 2% 3%


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PGCIL 1-year Forward P/B

Source: Company, Bloomberg, HDFC sec Inst Research

PGCIL 1-year Forward P/E

Source: Company, Bloomberg, HDFC sec Inst Research

The stock currently trades at a

valuation of 1.6x one-year

forward P/B, near one

standard deviation below

historical mean

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Income Statement

(Rs mn) FY14 FY15 FY16E FY17E FY18E

Net Revenues 152,303 171,772 208,022 261,382 304,089

Growth (%) 21.6 12.8 21.1 25.7 16.3

Transmission and Other Expenses 13,323 13,552 15,409 20,031 25,039

Employee Expenses 9,417 10,237 9,805 10,982 12,080

Total Expenses 22,739 23,788 25,214 31,013 37,119

EBIDTA 129,563 147,984 182,808 230,369 266,970

EBIDTA % 85.1 86.2 87.9 88.1 87.8

EBIDTA Growth % 21.0 14.2 23.5 26.0 15.9

Depreciation 39,957 50,854 61,828 76,747 87,003

EBIT 94,518 103,158 127,064 158,122 184,467

Other Income (Including EO Items) 4,911 6,028 6,084 4,500 4,500

Interest 31,675 39,793 50,230 63,305 72,783

PBT 62,843 63,365 76,835 94,817 111,684Tax 17,663 13,394 15,920 19,438 22,895

RPAT 45,179 49,971 60,915 75,380 88,789

EO (Loss) / Profit (Net Of Tax) 205 471 647 - -

APAT 44,974 49,500 60,915 75,380 88,789

APAT growth % 15.9 10.1 23.1 23.7 17.8

Adjusted EPS (Rs) 8.6 9.5 11.6 14.4 17.0

EPS growth % 2.6 10.1 23.1 23.7 17.8


Balance Sheet

(Rs mn) FY14 FY15 FY16E FY17E FY18E

SOURCES OF FUNDS

Share Capital 52,316 52,316 52,316 52,316 52,316

Reserves 292,280 329,350 375,024 432,312 499,792

Total Shareholders

Funds344,596 381,666 427,340 484,628 552,108

Minority Interest

Deferred Revenue 45,175 47,629 57,239 62,962 69,259

Long-term Debt 767,902 893,758 1,002,398 1,063,861 1,147,812

Short-term Debt 63,796 56,687 75,447 83,363 90,206

Total Debt 831,699 950,446 1,077,844 1,147,224 1,238,018

Deferred Taxes 24,430 24,722 24,894 24,894 24,894

Long-term Provisions &

Others18,617 16,781 19,884 22,867 25,153

TOTAL SOURCES OFFUNDS

1,264,516 1,421,243 1,607,200 1,742,575 1,909,432

APPLICATION OF FUNDS

Net Block 907,794 1,027,282 1,152,477 1,376,168 1,569,165

CWIP 318,514 398,822 437,202 362,202 312,202

Goodwill

Investments 9,987 9,264 8,069 8,069 8,069

LT Loans & Advances 70,750 70,194 87,080 91,434 100,577

Inventories 7,124 7,178 8,237 10,922 12,706

Debtors 15,785 21,187 27,380 32,239 37,507

Other Current Assets 21,763 28,453 39,308 43,239 47,563

Cash & equivalents 44,175 20,630 24,537 15,958 39,339

Total Current Assets 88,847 77,447 99,462 102,358 137,115

Creditors 3,291 3,930 3,139 4,338 5,047

Other Current Liabilities

& Provisions128,084 157,836 173,950 193,317 212,649

Total Current Liabilities 131,375 161,766 177,089 197,655 217,696

Net Current Assets (42,529) (84,319) (77,628) (95,297) (80,581)

TOTAL APPLICATION OF

FUNDS1,264,516 1,421,243 1,607,200 1,742,575 1,909,432

Source: Company, HDFC Sec Inst Research

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RECOMMENDATION HISTORY

Rating Definitions

BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period

NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period

SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

Date CMP Reco Target

13-May-16 142 BUY 175

30-May-16 151 BUY 179

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180

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Power Gr id TP

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HDFC securities

Institutional Equities

Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park, Senapati Bapat Marg, Lower Parel,

Mumbai - 400 013

Board : +91-22-6171 7330

www.hdfcsec.com

Disclosure:I, Maulik Doshi, MBA author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subjectissuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or itsAssociate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. FurtherResearch Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest.Any holding in stock No

Disclaimer:This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled orarrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation ofwarranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is forinformation purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not beconstrued as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments.This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in anylocality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject HDFCSecurities Ltd or its affiliates to any registration or licensing requirement within such jurisdiction.If this report is inadvertently send or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This document maynot be reproduced, distributed or published for any purposes without prior written approval of HDFC Securities Ltd .Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derivedfrom them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk.

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