We reiterate ‘buy’ rating on Power Grid Corporation of India (PGCIL) with a target price of R129 per share. The company continues to show its execution prowess. PGCIL has commissioned the crucial Raichur-Solapur line well ahead of the schedule, once again underlining its execution prowess. PGCIL remains a solid defensive growth story and our top pick in the sector. The stock trades at FY15f 1.4x P/B (BPS of R72.3) and 10.3x P/E (EPS of R9.7).
Our target price of R129 is the sum of the value of FY14f non-encumbered financial assets (R14.4 per share), equity invested in CWIP as of FY14F (R25 per share), and the value of operating assets using a residual income (RI) model (R89.9), wherein we assume a 12.5% cost of equity, 15.5% terminal ROE, and 2% perpetual growth in corebusiness income.
PGCIL commissioned the 765kV single-circuit Raichur- Solapur transmission line on December 31, 2013, thereby synchronously interconnecting the Southern Grid with the National Grid. In addition, the 208 ckm (circuit kilometre) transmission line has been commissioned five months ahead of contractual schedule (May 31, 2014) at a cost of R815 crore. According to reports, the line may not transmit power to the full capacity and it will take at least four months before the line becomes fully operational.
As the transmission line has been commissioned months ahead of schedule, we believe PWGR would be eligible for an assured 16% post-tax RoE for this project (15.5% + 0.5% for early completion). As per PWGR’s tariff petition, project cost up to commercial start-up date (February 1, 2014) is pegged at R54.8 crore.