Power Grid
BSE SENSEX
33,597
S&P CNX
10,325
5 April 2018
Update | Sector: Utilities
CMP: INR197
TP: INR287(+45%)
Buy
Expect strong double-digit IRRs in TBCB projects
A strong business and attractive valuations keep us optimistic
Analysis suggests strong double-digit IRRs in TBCB projects
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val ( INRm)
Free float (%)
Financials Snapshot (INR b)
Y/E Mar
Net Sales
EBITDA
PAT
EPS (INR)
Gr. (%)
BV/Sh (INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
2018E 2019E 2020E
298.2
262.7
88.6
16.9
21.3
108.5
16.6
8.2
11.4
1.8
350.3 388.5
310.6 344.6
108.2 114.7
20.7
22.1
17.7
8.8
9.4
1.6
21.9
6.0
16.5
8.8
8.9
1.4
PWGR IN
5,232
226 / 189
0/-10/-11
1,014.9
15.3
1285.0
43.1
We analyzed the tariff-based competitive bidding (TBCB) projects from the annual
reports of Power Grid’s (PWGR) subsidiaries. In our view, PWGR will generate more
than 14% equity IRR (debt/equity ratio of 80/20) on its TBCB projects. The equity
IRR on the three projects that are fully commissioned is ~24-38%. PWGR enjoys a
competitive edge due to its (a) low cost of borrowed funds, (b) dominant position
with suppliers and (c) vast geographical spread, which should continue driving
healthy returns.
International experience: Even developed countries need to keep investing
Transmission order inflows are expected to be low over the next few years, but the
long-term growth potential is huge. Experience from China and the US suggests
that the transmission infrastructure continues increasing in tandem with
generation (demand) growth. Renewable generation capacities, flexibility and
redundancy requirements also aid transmission investment, as seen in the US/UK
over the past few years. India, with just one third of the world’s per capita
electricity consumption, has huge growth potential. Separation of carriage and
content, as proposed in the draft Electricity Act, will provide another growth
stream to PWGR, in our view.
124.8 141.7
Intra-state to aid growth; Consultancy and Telecom to grow strongly
Intra-state transmission opportunity is ~1.5-2x the size of inter-state transmission
in India. However, states have been reluctant to offer intra-state projects on TBCB
due to healthy regulated returns. Unlike their DISCOMs, state TRANSCOs are not
cash starved. PWGR expects a pick-up in TBCB activity from states like Jharkhand,
UP, Telangana and Tamil Nadu. Its JV proposal with UP is also in the final stages.
Consultancy and Telecom businesses are expected to grow at a healthy 15-20%
over the next few years. Success in the telecom towers business (pilot running
successfully over the past year) will support growth in Telecom.
Shareholding pattern (%)
As On
Promoter
DII
FII
Others
Dec-17 Sep-17 Dec-16
56.9
12.0
24.4
6.7
57.9
9.7
25.7
6.6
57.9
8.3
26.8
7.1
FII Includes depository receipts
Stock Performance (1-year)
Power Grid Corpn
Sensex - Rebased
245
230
215
200
185
Strong business and attractive valuations; Re-iterate Buy
PWGR has ~INR1t of orders pending execution, providing strong visibility of EPS
CAGR of ~12% over FY18-22. The earnings estimate factors in a 150bp cut in the
regulated RoE (to 14%) in the next tariff regulations. However, with bond yield
rising over the last few months, the extent of such cut could be lower, in our view.
At CMP, the stock is trading attractively at 1.4x FY20E P/BV for an RoE of ~16% and
a CoE of ~10-11%, not appreciating any future growth potential. If we were to
assume no growth after FY20, which means PAT is available for dividend
distribution, the stock is trading at an attractive dividend yield of ~11% for an
assured return model and revenues backed by state-guarantees (g-sec yield is ~7 to
8%). We re-iterate our
Buy
rating with a DCF-based target price of INR287/share.
Sanjay Jain – Research analyst
(SanjayJain@MotilalOswal.com); +91 22 6129 1523
Dhruv Muchhal – Research analyst
(Dhruv.Muchhal@MotilalOswal.com); +91 22 6129 1549
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Power Grid
Analysis of TBCB projects
Expect strong double-digit IRR
On analyzing TBCB projects from the annual reports of subsidiaries, we estimate
that PWGR will earn a healthy equity IRR of more than 14% on its TBCB projects.
It is generating an equity IRR of ~24-38% on the three projects that are fully
commissioned. PWGR’s returns on the TBCB projects are comparable to returns
under the regulated model, but do not face any regulatory risk.
The project cost estimates are based on the amount already spent, the capital
commitment remaining (based on the numbers reported in the FY17 annual
report) and the estimated additional capex needed. For the recently awarded
projects, the cost is taken based on the cost estimated by the empowered
committee on transmission. The Parli and Warora TBCB lines are facing some
delays on account of the severe right of way issues in Maharashtra due to the
change in the land competition rules by the state government.
We continue maintaining that PWGR has a competitive edge in TBCB projects,
given its (a) lower funding cost due to its strong balance sheet, (b) low
equipment cost due to its dominant position with suppliers and (c) ability to
leverage its vast geographical spread, which will continue driving healthy IRRs in
the TBCB projects.
Exhibit 1: TBCB projects
Proj. cost
Est.
INR m
12,414
13,236
726
3,350
12,648
17,791
24,422
29,520
32,460
13,210
159,777
Zero
Date
Mar-12
Aug-13
Mar-14
May-14
Feb-15
Apr-15
Apr-15
Dec-15
Mar-17
Jan-18
Scheduled
CoD
Feb-15
Sep-16
Sep-16
May-17
Jun-18
Jan-18
Jan-18
Apr-19
Jul-20
Mar-21
Actual
CoD
Level.
Tariff
INR m
987
2,311
168
594
2,110
2,567
2,901
3,590
4,987
1,386
21,601
Revenue
Yield
%
8
17
23
18
17
14
12
12
15
10
14
IRR
%
2
26
38
24
24
13
12
23
5
15
NM Transmission*
Vizag
Unchahar Transmission
Kala AMB
Jabalpur Transmission
Parli
Warora
Southern Interconnector
Medinipur-Jeerat
Eastern Scheme –XXI (ERSS-XXI)
Total
*Partially commissioned
Aug-16
Sep-16
Jul-17
Source: MOSL, Company
Exhibit 2: TBCB project cost estimate from annual reports of subsidiaries
Gross
Block
INR m
8,055
726
92
0
30
41
337
13,119
Adv.
CWIP
INR m
2,868
0
4,868
2,280
2,085
5,063
7,458
117
INR m
21
0
1
380
142
562
684
Capital
Commit.
INR m
879
0
18,656
8,837
934
10,508
12,757
Proj. cost
as per FY17 AR
INR m
11,823
726
23,616
11,498
3,191
16,174
21,236
13,236
Proj. cost
Est.
INR m
12,414
726
29,520
12,648
3,350
17,791
24,422
13,236
NM Transmission
Unchahar Transmission
Southern Interconnector
Jabalpur Transmission
Kala AMB
Parli
Warora
Vizag
Source: MOSL, Company
5 April 2018
2

Power Grid
International experience
Even the developed countries need to keep investing
The inflow of new transmission orders has slowed down. In our view, the
situation is likely to remain the same, at least over the next few years, until
demand catches up with the capacity being added. However, we see huge long-
term growth potential.
Transmission sector growth is linked to growth in electricity consumption, as
well as the requirement for efficiency, redundancy and flexibility. With India’s
per capita electricity at just one third of global average, the scope for an
increase in the country’s electricity consumption is huge as incomes rise and
last-mile connectivity improves. This, along with the need to connect new
generation sources like wind/solar, will drive strong growth in India’s
transmission sector over the long term, in our view.
China’s transmission line length and transformation capacity has grown at a
CAGR of ~9% and 13%, respectively, as electricity sales grew by ~9% at China’s
State Grid Corporation (SGCC) over the last 11 years.
The US’ transmission investment history suggests a similar pattern – growth was
strong until 1960-70s as generation growth was strong. Over the last few years,
even though generation growth has been slow, transmission investment has
picked up, driven by demand from renewable capacity addition, reliability and
replacement. A similar trend is observed in the UK.
PWGR, with its competitive edge, is well placed to capture the long-term growth
potential of transmission in India.
SGCC is among the two grid companies created after the electricity reforms in 2002
in China. It provides transmission and distribution services in 88% of the national
territory.
Exhibit 3: SGCC area’s peak load
Peak load - GW
536 561
654 631 649
699
Exhibit 4: SGCC area’s electricity sales
Electricity sales - TWh
262
307
343 370
417
484
Source: MOSL, SGCC
Source: MOSL, SGCC
5 April 2018
3

Power Grid
Exhibit 5: SGCC area’s transmission length
Transmission length > 110 (66)Kv - km ('000)
713
771
844
890
938
Exhibit 6: SGCC area’s transformation capacity
Transformation capacity - TVA/TW
3.24 3.37
3.60
3.91
382 413
457
496
561
619 655
0.98 1.14
1.34
1.60
1.89
2.13
2.39
2.81
Source: MOSL, SGCC
Source: MOSL, SGCC
Grid annual investment
capex has increased over
the years
Exhibit 7: SGCC grid investment capex
Investment capex - RMB b
452
303
302
305
338
386
498
116
177
213
250
264
Source: MOSL, Company
Exhibit 8: US electricity generation growth – %
Electricity generation - yoy % (rhs)
20
15
10
5
0
-5
-10
Electricity generation - yoy % (rhs) 3yr mv avg.
~8% p.a
~3% p.a
~1% p.a
Source: MOSL, Company
5 April 2018
4

Power Grid
Exhibit 9: US transmission circuit miles
Investment in transmission
has picked up again even
without growth in
generation
Source: www.energy.gov
US transmission investment
has increased sharply,
driven by demand to
connect new renewable
energy sources, reliability
and replacement
Exhibit 10: US transmission construction expenditure
30
24
18
12
6
0
Transmission - USD b
Source: MOSL, EEI
UK transmission investment
has also picked up, despite
generation growth being
slow, driven by renewable
energy and inter-
connection with Europe
Exhibit 11: UK transmission capex
1,750
1,400
1,050
700
350
0
NGET capex - £ m
Generation - yoy % (rhs)
8
6
3
0
-3
-6
-8
Source: MOSL, EEI
5 April 2018
5

Power Grid
Many opportunities in intra-state transmision
Consultancy and Telecom to grow by 15-20%
Intra-state projects to aid growth
PWGR expects a pick-up in TBCB activity in the intra-state projects from
Jharkhand, Telangana and Tamil Nadu. The JV route is also being explored – UP
is in the final stages, while Bihar is operating well. It has also offered consulting
business to states that wish to own their projects.
While the size of the intra-state transmission business is huge (expected to be
~INR1.6t v/s inter-state of ~INR1t over FY18-22), we believe TBCB opportunity
will be available mainly from states that are cash starved and want to
aggressively push for power availability. Our interactions with the state
government officials in the past have suggested that the states would prefer to
execute projects on their own (through state TRANSCO) given the regulated
returns. Unlike their DISCOMs, state TRANSCO are not cash starved and
generate good profits.
Separation of carriage and content to open-up huge opportunities
The separation of carriage and content, as proposed in the draft Electricity Act,
can provide additional growth opportunity in its core area of laying lines.
In the current structure, distribution business comprises of both lines and supply
of power. PWGR cannot participate in the power supply business.
Laying of distribution lines is a larger business opportunity. In the US, the size of
the distribution business has been ~2-3x the size of transmission business
(based on the data available from 1984).
Distribution expenditure
has outpaced transmission
by ~2-3x annually
Exhibit 12: US transmission and distribution construction expenditure
25
20
15
10
5
0
Transmission - USD b
Distribution - USD b
Source: MOSL, EEI
5 April 2018
6

Power Grid
Consultancy and Telecom to grow by 15-20%
Consultancy business is expected to grow by 15-20% over the next few years,
driven by businesses with state TRANSCOs, railway orders and overseas
opportunities. The business, however, could be lumpy. Revenue/PBT CAGR of
the Consulting business over the last five years was 15%/19%.
Telecom fiber business is expected to grow by ~15% over the next few years as
India’s bandwidth requirement grows and PWGR takes advantage of its
positioning as an alternative supplier. Revenue/PBT CAGR of the Telecom
business over the last five years was 24%/31%.
PWGR is also pursuing opportunities in the Telecom Tower business, with the
pilot project running successfully over the last year. PWGR has more than 150k
towers, of which majority are in the rural areas. Success in the Tower business
can boost growth of the Telecom business, in our view.
Consultancy and Telecom represent ~5-6% of the company’s consolidated PAT.
Stronger growth in these businesses will aid RoE, given the limited capital
requirement.
5 April 2018
7

Power Grid
Valuations are attractive
Expect strong-double digit RoE
PWGR has ~INR1t of orders pending execution, which provides strong visibility of
EPS CAGR of ~12% over FY18-22. The earnings estimate factors in a 150bp cut in the
regulated RoE (to 14%) in the next tariff regulations. However, with bond yields
rising over the last few months, the extent of such cut could be lower, in our view.
At CMP, the stock is trading attractively at 1.4x FY20E P/BV for an RoE of ~16% and a
CoE of ~10-11%, not appreciating any future growth potential. If we were to assume
no growth after FY20, which means PAT is available for dividend distribution, the
stock is trading at an attractive dividend yield of ~11% for an assured return model
and revenues backed by state guarantees (g-sec yield is 7-8%). We value PWGR on a
DCF basis. Under our DCF-based valuation approach, for the next phase from FY23-
32, we consider an 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 price is INR287/share. Re-iterate
Buy.
Exhibit 13: PWGR one-year forward P/E
P/E (x)
28.0
22.0
16.0
10.0
4.0
13.8
17.2
10.3
9.5
9.5
Avg (x)
Max (x)
Min (x)
+1SD
24.1
-1SD
Source: MOSL, Company
Exhibit 14: PWGR one-year forward P/BV
P/B (x)
3.5
3.0
2.5
2.0
1.5
1.0
2.3
1.9
1.5
1.3
1.6
3.0
Avg (x)
Max (x)
Min (x)
+1SD
-1SD
Source: MOSL, Company
5 April 2018
8

Power Grid
Financials and Valuations
Chapter Title
Income Statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Min. Int. & Assoc. Share
Reported PAT
Adjusted PAT
Change (%)
Chapter Sub Title…
This is Text Style…
2013
131,639
26.1
112,139
85.2
34,278
77,861
2014
156,754
19.1
132,639
84.6
40,794
91,845
Chapter Subhead …
2015
176,585
12.7
151,262
85.7
51,733
99,529
40,812
5,745
-421
64,041
13,579
21.2
0
50,463
50,883
10.9
2016
213,523
20.9
186,056
87.1
63,022
123,034
50,860
4,284
-9
76,450
16,304
21.3
0
60,146
60,155
18.2
2017
257,039
20.4
226,572
88.1
77,223
149,350
62,036
5,838
0
93,153
20,063
21.5
0
73,090
73,090
21.5
2018E
298,181
16.0
262,703
88.1
79,866
182,837
78,802
8,473
0
112,509
23,865
21.2
0
88,643
88,643
21.3
2019E
350,292
17.5
310,640
88.7
93,532
217,109
(INR Million)
2020E
388,544
10.9
344,599
88.7
108,717
235,882
25,994
5,632
316
57,814
14,688
25.4
0
43,126
42,810
29.2
32,537
4,707
-425
63,590
18,114
28.5
0
45,476
45,901
7.2
88,526
8,650
0
137,232
29,043
21.2
0
108,189
108,189
22.1
99,122
8,640
0
145,400
30,734
21.1
0
114,666
114,666
6.0
Balance Sheet
Y/E Mar
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2013
46,297
217,734
264,031
692,334
57,415
1,013,780
823,160
197,475
625,685
194,716
5,864
307,576
163,467
14,914
26,789
102,407
120,061
120,061
0
187,516
1,013,780
2014
52,316
294,664
346,979
842,196
70,195
1,259,370
982,247
239,730
742,517
323,911
4,234
344,235
183,914
16,183
49,744
94,395
155,527
155,527
0
188,708
1,259,370
2015
52,316
332,071
384,387
962,434
73,030
1,419,852
1,204,801
292,891
911,911
404,760
2,196
288,776
139,241
22,070
29,886
97,580
187,791
187,791
0
100,985
1,419,852
2016
52,316
387,383
439,699
1,085,449
82,169
1,607,318
1,214,908
63,965
1,150,942
354,021
9,185
278,769
109,163
27,395
22,434
119,778
185,600
185,600
0
93,170
1,607,318
2017
52,316
446,339
498,655
1,189,879
74,184
1,762,718
1,519,616
142,837
1,376,779
296,750
11,650
271,272
94,963
31,319
33,536
111,453
193,732
193,732
0
77,539
1,762,718
2018E
52,316
515,537
567,853
1,287,939
74,184
1,929,975
1,824,401
222,703
1,601,699
244,779
11,650
245,120
91,444
30,814
19,709
103,153
173,272
173,272
0
71,848
1,929,975
(INR Million)
2019E
52,316
600,518
652,834
1,382,084
74,184
2,109,101
2,138,485
316,234
1,822,250
181,664
11,650
271,467
95,824
34,323
22,948
118,372
177,930
177,930
0
93,538
2,109,101
2020E
52,316
688,839
741,155
1,458,341
74,184
2,273,680
2,448,334
424,951
2,023,383
132,262
11,650
288,972
100,995
40,376
21,469
126,133
182,587
182,587
0
106,385
2,273,680
5 April 2018
9

Power Grid
Financials and Valuations
Ratios
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
RoIC
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Current Liabilities (Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2.5
2.3
2.4
2.4
2.3
2.2
2.1
1.9
2.7
17.1
6.8
8.3
0.0
0.2
41
167
122
1.3
14.2
6.1
7.9
0.0
0.2
38
165
139
2.5
13.9
6.2
8.4
0.0
0.2
46
108
145
17.4
8.4
2.3
11.4
1.1
5.2
14.2
6.5
8.6
0.0
0.2
48
94
160
13.9
6.8
2.0
9.6
1.3
8.4
15.6
7.3
8.9
0.0
0.2
44
70
142
11.4
6.0
1.8
8.7
1.6
6.6
16.6
8.2
9.4
0.0
0.2
38
61
115
9.4
5.0
1.6
7.6
1.9
6.6
17.7
8.8
9.7
0.0
0.2
36
58
108
8.9
4.5
1.4
7.1
2.2
6.9
16.5
8.8
9.3
0.0
0.2
38
57
103
9.2
16.7
57.0
2.8
35.0
8.8
16.6
66.3
2.6
35.1
9.7
19.6
73.5
2.0
25.2
11.2
23.0
84.0
2.1
0.0
14.0
28.7
95.3
2.5
21.0
16.9
32.2
108.5
3.1
22.5
20.7
38.6
124.8
3.7
22.1
21.9
42.7
141.7
4.2
24.1
2013
2014
2015
2016
2017
2018E
2019E
2020E
Y/E Mar
Adjusted EBITDA
Non cash opr. exp (inc)
(Inc)/Dec in Wkg. Cap.
Tax Paid
Other operating activities
CF from Op. Activity
(Inc)/Dec in FA & CWIP
Free cash flows
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax) & Others
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
Cash Flow Statement
2013
112,139
6,186
14,227
-11,356
-4,299
116,897
-226,145
-109,249
5,305
0
-220,840
0
138,868
-22,970
-16,279
99,619
-4,325
31,113
26,789
2014
132,639
4,430
10,137
-12,302
-2,921
131,983
-250,288
-118,305
4,139
0
-246,149
52,966
127,244
-28,374
-14,715
137,121
22,955
26,789
49,744
2015
151,262
5,325
61,903
-11,519
-4,243
202,728
-294,508
-91,780
7,934
0
-286,574
0
115,070
-37,816
-13,266
63,988
-19,858
49,744
29,886
2016
186,056
2,221
-19,310
-14,156
-4,730
150,082
-216,795
-66,713
1,030
0
-215,765
0
117,171
-47,584
-13,379
56,208
-9,475
31,909
22,434
2017
226,572
7,055
4,495
-18,714
-3,264
216,144
-239,244
-23,100
495
0
-238,749
0
112,506
-57,000
-15,921
39,586
16,980
16,556
33,536
2018E
262,703
8,473
-8,136
-23,865
-8,473
230,702
-252,815
-22,113
8,473
0
-244,342
0
98,060
-78,802
-19,445
-187
-13,827
33,536
19,709
2019E
310,640
8,650
-18,450
-29,043
-8,650
263,147
-250,968
12,179
8,650
0
-242,318
0
94,145
-88,526
-23,209
-17,590
3,239
19,709
22,948
(INR Million)
2020E
344,599
8,640
-14,327
-30,734
-8,640
299,538
-260,448
39,090
8,640
0
-251,808
0
76,257
-99,122
-26,345
-49,210
-1,479
22,948
21,469
5 April 2018
10

Power Grid
NOTES
5 April 2018
11

Explanation of Investment Rating
Investment Rating
BUY
SELL
NEUTRAL
UNDER REVIEW
NOT RATED
*In case the recommendation given by the Research Analyst becomes inconsistent with the investment rating legend, the Research Analyst shall within 28 days of the inconsistency, take appropriate measures to make the recommendation consistent with the investment rating legend.
Expected return (over 12-month)
>=15%
< - 10%
> - 10 % to 15%
Rating may undergo a change
We have forward looking estimates for the stock but we refrain from assigning recommendation
Power Grid
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Analyst ownership of the stock
Power Grid Corporation
No
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5 April 2018
12