3QFY2016 Result Update | Power

January 29, 2016

Power Grid Corporation of India

ACCUMULATE

CMP

`148

Performance Highlights

Target Price

`165

Standalone (` cr)

3QFY16

3QFY15

yoy (%)

2QFY16

qoq%

Investment Period

12 months

Total Revenue

5,407

4,354

24.2

4,918

9.9

EBITDA

4,797

3,770

27.2

4,318

11.1

Stock Info

Margin (%)

88.7

86.6

213bp

87.8

92bp

Sector

Power

Reported PAT

1,613

1,229

31.3

1,448

11.4

Market Cap (` cr)

75,204

Source: Company, Angel Research

Net Debt (` cr)

95,520

Beta

0.6

For 3QFY2016, Power Grid Corporation of India (PWGR) reported a strong

52 Week High / Low

159 / 121

23% yoy increase in transmission revenues to `5,143cr (5.5% ahead of our

Avg. Daily Volume

32,51,235

estimate of

`4,925cr), on account of higher than expected capitalisation.

Capitalisation for the quarter stood at `17,207cr, led by the commissioning of the

Face Value (`)

Biswanath Chariyali - Agra HVDC transmission line. Even on exclusion of this

BSE Sensex

24,470

line, total capitalisation stood at ~`9,000cr, well ahead of our expectation of

Nifty

7,425

`5,126cr. Capex incurred during the quarter, at `5,368cr, was also ahead of our

Reuters Code

PGRD.BO

estimate of

`4,882cr. We raise our FY2016 capitalisation estimate to

Bloomberg Code

PWGR IN

~`32,850cr, as against ~`22,000cr earlier.

Increased operating efficiency and higher capitalisation helped the company in

Shareholding Pattern (%)

improving its EBITDA margin by 213bp yoy to 88.7%. The EBITDA for the quarter

Promoters

57.9

came in at `4,797cr as against our estimate of `4,482cr. The Management

MF / Banks / Indian Fls

8.9

maintained its capex guidance of `22,500cr and `22,550cr for FY2016 and

FII / NRIs / OCBs

25.9

FY2017, respectively.

Indian Public / Others

7.3

Outlook and valuation

We raise our estimates marginally to factor in the higher-than-expected

capitalisation in 3QFY2016. We expect PWGR to report a revenue CAGR of

Abs. (%)

3m 1yr

3yr

~17% (vs 16% earlier) and the EBITDA to grow at a CAGR of 19% (vs 16%

Sensex

(9.5)

(17.2)

21.7

earlier) over FY2015-17E. At the current market price of `148, the stock trades at

PWGR

10.0

(3.7)

28.5

a P/BV of 1.8x and 1.6x its FY2016E and FY2017E BV of

`82 and `92,

respectively. We retain our target price of `165 on the stock, based on ~1.8x

3-year price chart

FY2017E P/BV, implying a 12% upside from the current levels and have an

170

160

Accumulate rating on the stock.

150

140

Key financials (Standalone)

130

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016E FY2017E

120

110

Net sales

12,758

15,230

17,177

20,669

23,666

100

% chg

25.5

19.4

12.8

20.3

14.5

Net profit

4,235

4,497

4,979

6,114

6,792

% chg

28.7

7.3

11.1

21.6

11.1

EBITDA margin (%)

85.8

85.1

86.2

88.1

Source: Company, Angel Research

EPS (`)

9.1

9.4

9.5

11.7

13.0

P/E (x)

16.1

15.8

15.5

12.6

11.4

P/BV (x)

2.6

2.2

2.0

1.8

1.6

RoE (%)

17.0

14.9

13.8

15.1

15.0

RoCE (%)

8.7

8.3

7.6

8.2

Rahul Dholam

EV/Sales (x)

10.6

10.2

9.9

8.7

7.9

Tel: 022- 3935 7800 Ext: 6847

EV/EBITDA (x)

12.3

12.0

11.5

9.8

9.0

[email protected]

Source: Company, Angel Research

Please refer to important disclosures at the end of this report

Power Grid Corporation of India | 3QFY2016 Result Update

Exhibit 1: 3QFY2016 performance (Standalone)

(` cr)

3QFY16

3QFY15

yoy%

2QFY16

qoq%

9MFY16

9MFY15

yoy%

Transmission Revenue

5,143

4,182

23.0

4,708

9.2

14,391

12,024

19.7

Other Operating Income

264

172

53.5

210

25.8

651

450

44.8

Total Revenue

5,407

4,354

24.2

4,918

9.9

15,042

12,474

20.6

Transmission Expenses

365

330

10.6

361

1.1

1,076

967

11.3

% of net sales

6.8

7.6

7.3

7.2

7.8

Employee Cost

245

254

(3.5)

239

2.5

714

742

(3.8)

% of net sales

4.5

5.8

4.9

4.7

5.9

Total expenditure

610

584

4.5

600

1.7

1,790

1,709

4.7

% of net sales

11.3

13.4

12.2

11.9

13.7

EBITDA

4,797

3,770

27.2

4,318

11.1

13,252

10,765

23.1

Margin (%)

88.7

86.6

213bp

87.8

92bp

88.1

86.3

242bp

Interest

1,288

1,025

25.7

1,149

12.1

3,546

2,942

20.5

Depreciation

1,580

1,301

21.5

1,448

9.1

4,398

3,667

19.9

Other income

132

(25.8)

109

(9.8)

278

396

(30.0)

Exceptional items

(1)

Profit before tax

2,026

1,547

30.9

1,830

10.7

5,586

4,480

24.7

% of net sales

37.5

35.5

37.2

37.1

35.9

Tax

413

318

29.7

382

7.9

1,158

914

26.7

% of PBT

20.4

20.6

20.9

20.7

20.4

Net Profit

1,613

1,229

31.3

1,448

11.4

4,428

3,567

24.1

Source: Company, Angel Research

Exhibit 2: Standalone - 3QFY2016 Actual vs. Angel estimates

(` cr)

Actual

Estimates

Variation (%)

Revenue

5,407

5,125

5.5

EBITDA

4,797

4,482

7.0

EBITDA margin (%)

88.7

87.5

126bp

Net Profit

1,613

1,500

7.6

Source: Company, Angel Research

Result highlights

Revenue growth in line with expectation

PWGR reported a strong 23% yoy increase in transmission revenues to `5,143cr

(5.5% ahead of our estimate of `4,925cr), on account of higher than expected

capitalisation. Capitalisation for the quarter stood at `17,207cr, led by the

commissioning of the Biswanath Chariyali - Agra HVDC transmission line. Even on

exclusion of this line, total capitalisation stood at ~`9,000cr, well ahead of our

expectation of `5,126cr. Capex incurred during the quarter, at `5,368cr, was also

ahead of our estimate of `4,882cr. We raise our FY2016 capitalisation estimate to

~`32,850cr, as against ~`22,000cr earlier.

January 29, 2016

Power Grid Corporation of India | 3QFY2016 Result Update

Exhibit 3: Capitalisation well ahead of estimates

Exhibit 4: Strong revenue growth of ~24% yoy

20.0

3.5

6,000

17.2

18.0

3.0

5,000

16.0

14.0

2.5

4,000

12.0

2.0

3,000

10.0

7.2

6.9

1.5

8.0

6.4

2,000

5.6

5.8

5.1

5.4

6.0

4.9

4.4.7

4.9

5.0

4.5

5.0

1.0

3.0

1,000

4.0

0.5

2.0

3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

Capex

Capitalisation

Capitalisation/Capex (x)

Revenue (` Cr)

yoy change (%)

Source: Company, Angel Research

Consultancy revenues came in in-line with our estimate at `114cr, while telecom

revenues surprised positively, increasing by 45% yoy to `103cr (as against our

estimate of `86cr). Led by the positive surprise in transmission and telecom

revenues, total revenue at ~`5,407cr was 5.5% ahead of our estimate of

`5,125cr.

Increased operating efficiency and higher capitalisation helped the company in

improving its EBITDA margin by 213bp yoy to 88.7%. The EBITDA for the quarter

came in at `4,797cr as against our estimate of `4,482cr.

Depreciation increased ~22% yoy to `1,580cr, and is 3.4% ahead of our estimate

of `1,529cr, led by higher than expected capitalisation. Interest costs at `1,288cr

(as against our expectation of `1,160cr) too came in higher by 26% yoy, led by

increased capitalisation. Other income, at `113cr, was higher than our estimate of

`102cr. Tax expenses at `413cr were 4.2% higher than our estimate. Net profit

jumped 31% yoy to `1,613cr (7.6% higher than our estimate of `1,500cr).

The Management has maintained its capex guidance of `22,500cr and `22,550cr

for FY2016 and FY2017, respectively.

Exhibit 5: EBITDA margin increases ~213bp yoy

Exhibit 6: Net profit jumps ~31% yoy

6,000

1,800

1,600

5,000

1,400

4,000

1,200

1,000

3,000

800

2,000

600

400

1,000

200

EBITDA (` Cr)

Margin (%)

PAT (` Cr)

Margin (%)

Source: Company, Angel Research

January 29, 2016

Power Grid Corporation of India | 3QFY2016 Result Update

Investment arguments

Huge investments lined up for augmenting power generation and

transmission capacities

Power generation capacity in the country is expected to increase to ~318GW by

the end of the XII plan and a further addition of ~110GW has been planned

during the XIII plan. The transmission sector is also expected to see huge

investments of ~`1,80,000cr and ~`2,00,000cr during the XII and XIII plans,

respectively. A majority of these investments are expected to be towards

inter-regional transmission. PWGR has planned a capital outlay of `1,10,000cr

during the XII plan. Further, we expect ~60-65% of XIII plan investments in the

transmission sector towards inter-state transmissions, implying a capex outlay of

~`1,20,000cr - `1,30,000cr by PWGR.

Regulated ROE model assures steady earnings growth

PWGR receives a fixed return on equity (ROE) of 15.5%, with an additional 0.5%

for timely completion of projects, as per norms laid out by the Central Electricity

Regulatory Commission (CERC). The fixed ROE model implies that earnings growth

is directly linked to the growth in assets capitalised. PWGR’s current outlay over the

next two years (CWIP + capex) is upward of `1 lakh cr, providing strong earnings

visibility.

January 29, 2016

Power Grid Corporation of India | 3QFY2016 Result Update

Outlook and valuation

We like PWGR for its high quality earnings as well as for the growth offered by its

regulated equity model. The company has had a good execution track record in

the past and we expect the same to continue. Strong entry barriers for new entrants

on account of huge investments that are required in the transmission sector, place

the company is a strong position. We raise our estimates marginally to factor in the

higher-than-expected capitalisation in 3QFY2016. We expect PWGR to report a

revenue CAGR of ~17% (vs 16% earlier) and the EBITDA to grow at a CAGR of

19% (vs 16% earlier) over FY2015-17E.

At the current market price of `148, the stock trades at a P/BV of 1.8x and 1.6x its

FY2016E and FY2017E BV of `82 and `92, respectively. We retain our target price

of `165 on the stock, based on ~1.8x FY2017E P/BV, implying a 12% upside from

the current levels. We have an Accumulate rating on the stock.

Exhibit 7: Valuation (FY2017E)

Price / BV

(` cr)

Equity

47,979

Multiple (x)

1.8

Equity Value

86,363

Target price (`)

165

Source: Company, Angel Research

Company background

Power Grid Corporation of India Ltd is the Central Transmission Utility (CTU) of the

country and a 'Navratna' company operating under the Ministry of Power. The

company is engaged in the power transmission business with the responsibility for

planning, implementation, operation and maintenance of inter-state transmission

system and operation of National & Regional Power Grids. As of December 31^st

2015, the company owned and operated a transmission network of about

1,26,965ckm of transmission lines and 205 EHVAC & HVDC substations with

transformation capacity of about 2,46,004MVA. The company continues to wheel

~50% of total power generated in the country through its transmission network

with a consistently high availability of over 99.9%.

January 29, 2016

Power Grid Corporation of India | 3QFY2016 Result Update

Profit & Loss Statement (Standalone)

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016E

FY2017E

Transmission Charges

11,754

14,046

16,451

19,749

22,648

Telecom+Consultancy Revenue

547

903

655

838

923

Net Sales

12,300

14,949

17,106

20,587

23,571

Other operating income

457

281

Total operating income

12,758

15,230

17,177

20,669

23,666

% chg

25.5

19.4

12.8

20.3

14.5

Transmission Expenses

368

456

605

609

698

Employee Expenses

886

942

1,024

982

1,136

Other Mfg costs

558

849

706

827

923

Provisions

EBITDA

10,943

12,961

14,799

18,210

20,861

% chg

28.6

18.4

14.2

23.1

14.6

(% of Net Sales)

85.8

85.1

86.2

88.1

Depreciation& Amortisation

3,352

3,996

5,085

6,101

7,279

EBIT

7,591

8,965

9,713

12,109

13,581

% chg

27.8

18.1

8.3

24.7

12.2

(% of Net Sales)

59.5

58.9

56.5

58.6

57.4

Interest & other Charges

2,535

3,168

3,979

4,796

5,497

Other Income

571

491

603

390

473

(% of PBT)

10.1

7.8

9.5

5.1

5.5

Share in profit of Associates

Recurring PBT

5,627

6,289

6,337

7,704

8,558

% chg

21.9

11.8

0.8

21.6

11.1

Extraordinary Inc/(Expense)

(25)

(47)

(0)

PBT (reported)

5,645

6,264

6,289

7,703

8,558

Tax

1,410

1,766

1,310

1,589

1,766

(% of PBT)

25.0

28.2

20.8

20.6

PAT (reported)

4,235

4,497

4,979

6,114

6,792

ADJ. PAT

4,216

4,523

5,027

6,114

6,792

% chg

28.7

7.3

11.1

21.6

11.1

(% of Net Sales)

33.0

29.7

29.3

29.6

28.7

January 29, 2016

Power Grid Corporation of India | 3QFY2016 Result Update

Balance Sheet (Standalone)

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016E

FY2017E

SOURCES OF FUNDS

Equity Share Capital

4,630

5,232

Reserves & Surplus

21,610

29,228

32,935

37,584

42,748

Shareholders Funds

26,239

34,460

38,167

42,815

47,979

Share Warrants

Total Loans

68,188

83,170

95,045

1,13,464

1,20,455

Deferred Tax Liability

1,959

2,443

2,472

2,501

2,531

Other Long term liabilities

4,708

5,855

5,861

7,516

8,054

Long term provisions

443

524

580

698

799

Total Liabilities

1,01,537

1,26,452

1,42,124

1,66,994

1,79,818

APPLICATION OF FUNDS

Gross Block

80,600

96,504

1,18,264

1,51,122

1,70,289

Less: Acc. Depreciation

19,199

23,350

28,578

34,679

41,958

Net Block

61,401

73,154

89,686

1,16,443

1,28,331

Capital Work-in-Progress

19,115

31,851

39,882

27,428

32,125

Construction Stores

21,038

21,479

16,409

18,951

17,637

Investments

964

814

741

Non-current Loans & Adv.

2,351

3,190

3,652

4,588

5,254

Current Assets

6,265

9,100

7,930

18,218

17,918

Cash

1,662

4,418

2,063

11,311

10,035

Loans & Advances

429

472

566

682

780

Other

4,175

4,211

5,301

6,226

7,103

Current liabilities

9,597

13,138

16,177

19,376

22,188

Net Current Assets

(3,331)

(4,037)

(8,246)

(1,158)

(4,270)

Mis. Exp. not written off

Total Assets

1,01,537

1,26,452

1,42,124

1,66,994

1,79,818

January 29, 2016

Power Grid Corporation of India | 3QFY2016 Result Update

Cash flow statement (Standalone)

Y/E March (` cr)

FY2013

FY2014

FY2015E FY2016E FY2017E

Profit before tax

5,645

6,264

6,289

7,703

8,558

Depreciation

3,380

4,011

5,085

6,101

7,279

Change in Working Capital

1,241

3,333

1,099

2,748

2,345

Others

2,091

2,809

3,536

6,009

5,656

Direct taxes paid

(1,072)

(1,157)

(1,126)

(1,589)

(1,766)

Cash Flow from Operations

11,284

15,259

14,884

20,972

22,073

(Inc.)/ Dec. in Fixed Assets

(22,389)

(26,735)

(24,085)

(22,945)

(22,550)

(Inc.)/ Dec. in Investments

137

149

Others

303

209

327

(936)

(665)

Cash Flow from Investing

(21,948)

(26,378)

(23,686)

(23,882)

(23,215)

Issue of Equity

5,297

Inc./(Dec.) in loans

13,795

12,720

11,358

18,419

6,991

Dividend Paid (Incl. Tax)

(1,569)

(1,391)

(1,232)

(1,465)

(1,628)

Others

(2,236)

(2,752)

(3,679)

(4,796)

(5,497)

Cash Flow from Financing

9,990

13,874

6,447

12,158

(134)

Inc./(Dec.) in Cash

(675)

2,756

(2,355)

9,248

(1,277)

Opening Cash balances

2,337

1,662

4,418

2,063

11,311

Closing Cash balances

1,662

4,418

2,063

11,311

10,035

January 29, 2016

Power Grid Corporation of India | 3QFY2016 Result Update

Key ratios

Y/E March

FY2013

FY2014

FY2015E

FY2016E

FY2017E

Valuation Ratio (x)

P/E (on FDEPS)

16.1

15.8

15.5

12.6

11.4

P/CEPS

9.0

8.3

7.6

6.3

5.5

P/BV

2.6

2.2

2.0

1.8

1.6

Dividend yield (%)

1.9

1.7

1.4

1.6

1.8

EV/Sales

10.6

10.2

9.9

8.7

7.9

EV/EBITDA

12.3

12.0

11.5

9.8

9.0

EV/Total Assets

1.3

1.2

1.1

1.0

Per Share Data (`)

Adjusted EPS (Basic)

9.1

9.4

9.6

11.7

13.0

Adjusted EPS (fully diluted)

9.1

9.4

9.6

11.7

13.0

Cash EPS

16.3

17.7

19.3

23.3

26.9

DPS

2.8

2.6

2.0

2.3

2.6

Book Value

56.7

65.9

73.0

81.8

91.7

Dupont Analysis

EBIT margin

59.5

58.9

56.5

58.6

57.4

Tax retention ratio (%)

75.0

71.8

79.2

79.4

Asset turnover (x)

0.1

0.2

ROIC (Post-tax)

6.7

6.1

6.2

6.8

7.0

Cost of Debt (Post Tax)

3.1

3.0

3.5

3.7

Leverage (x)

2.4

2.3

Operating RoE

15.1

13.6

12.4

14.5

14.6

Returns (%)

RoCE (Pre-tax)

8.7

8.3

7.6

8.2

Angel RoIC (Pre-tax)

15.6

15.4

13.9

13.6

12.8

RoE

17.0

14.9

13.8

15.1

15.0

Turnover ratios (x)

Asset Turnover (Gross Block)

0.2

0.1

Inventory (days)

Receivables (days)

Payables (days)

WC cycle (ex-cash) (days)

(116)

(161)

(199)

(201)

(206)

Solvency ratios (x)

Net debt to equity

2.5

2.3

2.4

2.3

Net debt to EBITDA

6.1

6.3

5.6

5.3

Interest Coverage

3.0

2.8

2.4

2.5

January 29, 2016

Power Grid Corporation of India | 3QFY2016 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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While Angel Broking Pvt. Limited endeavors to update on a reasonable basis the information discussed in this material, there may be

regulatory, compliance, or other reasons that prevent us from doing so.

This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced,

redistributed or passed on, directly or indirectly.

Neither Angel Broking Pvt. Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from

or in connection with the use of this information.

Note: Please refer to the important ‘Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the

latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Pvt. Limited and its affiliates may

have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement

Power Grid Corporation of India

1. Analyst ownership of the stock

2. Angel and its Group companies ownership of the stock

3. Angel and its Group companies' Directors ownership of the stock

Yes

4. Broking relationship with company covered

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Based on expected returns

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

over 12 months investment period):

Reduce (-5% to -15%)

Sell (< -15)

January 29, 2016