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Power Grid Corporation: Recommendation Review

| 2/23/2012 9:30 PM Thursday

We had recommended Power Grid Corporation of India (PGCIL) in DSIJ Vol. 26 Issue No. 22 (dated October 10-23, 2011) at a price of Rs 96. The scrip is currently trading at a premium of 16 per cent to the recommended price, at Rs 111.55. Our recommendation would have come as a surprise to many, especially as it came at a time when power stocks were severely hammered down by the market. However, we had said in our recommendation that a capex of Rs 90000 crore would drive the company’s growth. Besides, there were other compelling factors like better capitalisation of assets, improvement in debtor days and healthy revenues from the telecom segment. We had also observed that FIIs had increased their holding in the scrip.

We still stick to our recommendation remarks. The company has set aside a capex of Rs 1 lakh crore for the five year plan starting FY13, which will further boost revenues. Apart from this, we also see the sentiment in the power sector improving. The first and foremost reason is that the Prime Minister has instructed Coal India to shoulder the responsibility of supplying coal to the power sector. This will boost about 50000 MW of the power generating capacity and add to the volume of power being generated in the country, which will be wheeled by PGCIL. Besides, the Shunglu Committee has made a few recommendations which, when executed, will improve the financial position of SEBs – they will buy more power, increasing the transmission volumes in the country. PGCIL transmits more than 50 per cent of the power in the country, and hence, larger volumes generated by power companies will boost its revenues. The company has managed to maintain its EBITDA levels even in turbulent times, and this provides high visibility on the earnings front as well.

Apart from a strong business model, the financial performance has also been decent in the December 2011 quarter, wherein it reported a 20 per cent growth in topline and a 37 per cent growth in its bottomline. We expect the company to keep up the growth momentum and report a good set of numbers. We are confident that the scrip will touch Rs 120, and investors can hold on to it until then. Besides, the company is consistent in paying dividends, and with a good year expected, investors should not let go of this benefit.

 

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