MOSL: POWER GRID (Buy)-Weak numbers led by multiple factors-Valuations do not price in growth benefits
POWER GRID: Weak numbers led by multiple factors; Valuations do not price in growth benefits; Maintain Buy
(PWGR IN, Mkt Cap USD15.8b, CMP INR210, TP INR242, 15% Upside, Buy)
- 1QFY20 adj. standalone (S/A) PAT at INR23.1b (+3% YoY) came in 7% below our est. of INR24.9b due to non-recognition of project revenue, lower consultancy income and tax leakage on change in deferred tax recognition. S/A capitalization stood at INR14.2b (v/s INR37b in 1QFY19). Capex stood at INR29b.
- Implied transmission segment PAT grew ~6% YoY lower than regulated equity growth estimated at ~10% YoY.
- Revenue was impacted by ~INR250m given the non-recognition of tariff from one private generator project. Given the stranded nature of the event, this impact is likely to continue at least in the near term.
- The adjustment for DTA (since 4QFY19) is recognized as income under regulatory balances (v/s offset from DTL earlier). This results in a tax leak given its treatment as an income item. PWGR estimates this at ~INR200m for 1QFY20.
- Consultancy EBIT declined 51% YoY to INR0.4b. EBIT for Telecom segment was flat YoY at INR1.06b.
- PWGR has noted that following the revised order for Champa-Kurukshetra project, tariff for the project would now be recovered from states (under PoC mechanism) v/s private sector earlier.
Valuations remain attractive; Maintain Buy
- INR430b of projects are envisaged to be awarded for renewable integration. Of these, ~INR115b are under different stages of bidding. While there could be delays in their awarding, PWGR's recent project awards (three out of seven bid projects won), highlights its competitive positioning to win such projects as they arrive. We note that the capitalization run-rate for FY20 may be impacted by RoW issues for Raigarh-Pugalur HVDC. However, we believe this is more than reflected in the stock's current valuation. The stock trades at 1.5x/1.4x FY21/FY22E P/BV for steady long-term growth and under-penetrated market. Maintain Buy with DCF-based TP of INR242/share.
Power Grid Corp. of India is a power transmisson utilities company. Co. is engaged in the planning, coordination, supervision and control over inter-state transmission system and operation of national & regional power grids. Co.'s Power System Management business takes continuous action regarding operation and maintenance to seek to ensure compliance with prescribed standards as well as to achieve high availability of the system. In the telecom business, Co.'s brand name "POWERTEL" is the only utility in India having an overhead optic fiber network using optical ground wire on power transmission lines.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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