Inline; Capitalization momentum on track
Valuations not appreciating even nominal growth; Re-iterate Buy Power Grid’s (PWGR) 2QFY18 PAT grew 14% YoY to INR21.4b (est. INR20.9b). Capitalization was up ~50% YoY to INR99.7b. The 1H capitalization of ~INR135b (up 47% YoY) represents ~50% of the estimate for the full year FY18. Capex was up ~26% YoY to INR67b in 2QFY18.
* Telecom revenue/EBIT grew 21%/45% YoY in 2QFY18. The business has grown at CAGR of ~23% over FY14-17, which is expected to continue.
* Consultancy revenue/EBIT was down 25%/36% YoY in 2QFY18 due to certain payment issues. There is good potential in consultancy with opportunity of INR100b from Kerala (10% fees) and INR350b from railways, amongst others.
* States would be coming out with TBCB projects. The near-term potential is ~INR47b. TBCB projects are attractive as they do not have regulatory risk. PWGR has the largest share at ~45% of participated TBCB bids (based on annual levelized transmission charges). PWGR is also pursuing JVs with states.
* PWGR is also working on opportunity in telecom towers. It has competitive advantage of low electricity and land cost. Of its ~250k towers, ~8-10% can be deployed as telecom towers.
Sector outlook bullish; Valuations not appreciating even nominal growth; Buy
PWGR has ~INR1.1t worth of projects pending execution over the next 3-4 years that would drive EPS CAGR of ~15% over FY17-20E. We are building in cut in RoE to 14% (from 15.5%) from FY20. While there are concerns on PWGR’s growth potential thereafter, we remain bullish on investment in transmission due to India’s demand growth potential and rising RE. Yet, under our DCF based valuation approach for the next phase from FY23-32 we consider RoE of 14% and growth of just ~6% (i.e. 45% re-investment). In the terminal phase we further cut RoE to 12% and growth to just 3% (~22% re-investment). The target P/BV is 2.1x. At CMP the stock trades at 1.8x FY19E P/BV, not appreciating even nominal growth. We remain constructive with TP of INR261/sh.
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