Power Grid Corporation of India

Transcription

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2 Initiating Coverage Institutional Equities Power Grid Corporation of India 16 July 2012 Reuters: PGRD.BO; Bloomberg: PWGR IN Grid Of Growth And Permanence Augmenting capex followed by higher capitalisation (superior project execution run rate) of power transmission assets would boost core earnings of Power Grid Corporation of India (PGCIL). We believe PGCIL remains the safest bet among power transmission companies due to its annuity-based business model (15.5% post-tax regulated RoE) despite the sector s structural issues. Core demand, higher inter-regional capacity to limit regional deficits and reforms in the distribution space (state electricity boards losses, open access) are expected to increase the need for transmission corridors. We believe PGCIL is attractively positioned at the beginning of 12 th Five Year Plan (FY13-17), considering the huge capex outlay planned, driving up its regulated equity. We assign a Buy rating to PGCIL with a SOTP-based target price of Rs132, up 18% from the CMP. Higher capex to ensure growth: With an increased emphasis on integrating India s T&D network, PGCIL has planned capex outlay of Rs1trn under the 12 th Five Year Plan (FY13-17), 82% higher compared to Rs550bn capex incurred under the 11 th Plan (FY08-12). Considering its strong track record of project execution and the fact that 76% of planned capex of Rs1trn has already received investment approval, we forecast total capex outlay of Rs924bn until FY17E. This would lead to robust growth for PGCIL, as its earnings are linked to capex and the rate of capitalisation of transmission assets. Rising capitalisation to enhance RoE: We expect capex under the 12 th Plan to be front-ended (higher quantum in the initial years) based on planned transmission capacity addition over FY13-15E. Consequently, we expect capitalisation of transmission assets worth Rs170bn/Rs172bn in FY13E/FY14E, respectively, resulting in a 23.2% CAGR in regulated equity over FY12-15E compared to 17.6% CAGR achieved over FY Higher capitalisation leads to higher regulated equity (eligible for earning regulated returns) driving up the reported RoE from 13.9% in FY12 to 14.5%/15.7% in FY13E/FY14E, respectively. Augmentation of inter-regional capacity to reduce deficits: The intent to create a national grid to enhance connectivity among the regions will result in inter-regional capacity growing by 37GW in the 12 th Plan period, as per the Central Electricity Authority (CEA). It will help in capping the deficits among the regions via inter-regional energy exchange (21% CAGR in FY09-12) further aiding PGCIL s transmission growth. Valuation: We assign a Buy rating to PGCIL with a target price of Rs132, providing 18% upside from the CMP. We have valued the stock on SOTP basis, assuming cost of equity of 12%, RoE of 17% and growth of 7% in regulated equity. The target price comprises core transmission valuation of Rs127/share (based on 2.1x P/BV multiple on FY14E book value) and cash and investments valued at Rs5/share. Y/E Mar (Rsmn) FY10 FY11 FY12 FY13E FY14E Net sales 71,275 83, , , ,496 EBITDA 58,694 70,513 83, , ,034 Net profit 21,370 26,610 32,736 37,472 45,407 EPS (Rs) EPS growth (%) EBITDA margin (%) PER (x) P/BV (x) EV/EBITDA (x) Dividend yield (%) RoCE (%) RoE (%) BUY Sector: Power CMP: Rs112 Target Price: Rs132 Upside: 18% Chirag Muchhala chirag.muchhala@nirmalbang.com Nitin Arora Nitin.arora@nirmalbang.com Key Data Current Shares O/S (mn) 4,629.7 Mkt Cap (Rsbn/US$bn) 518.5/ Wk H / L (Rs) 115/94 Daily Vol. (3M NSE Avg.) 2,540,686 Share holding (%) 2QFY12 3QFY12 4QFY12 Promoter FII DII Corporate General Public One Year Indexed Stock Performance Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 POWER GRID CORP NSE S&P CNX NIFTY INDEX Price Performance (%) 1 M 6 M 1 Yr PGCIL Nifty Index (6.4) Source: Bloomberg

3 Valuation We initiate coverage on PGCIL with a target price of Rs132 based on SOTP valuation. We have valued FY14E regulated equity (core transmission business) of the company by assigning a P/BV of 2.1x (13% discount to its historical average of 2.4 since listing) based on the RoE and growth of 17% & 7%, respectively. We have assumed cost of equity at 12%. We have factored in a growth of 7% based on the CAGR in regulated equity over the 12 th Plan (FY13-17) and 13 th Plan (FY18-22). The RoE is taken at 17% due to the expansion in reported RoE along with returns to be generated from its other businesses like telecommunications, short-term open access and consultancy services. We have preferred P/BV valuation over DCF (discounted cash flow) methodology as we believe that for a company like PGCIL, which will incur higher growth capex in the 12 th Plan period, will keep its FCF and FCFE negative. Under DCF, the valuation is sensitive to cash flows generated from the terminal value (period assumed for the major growth capex to phase out and the company to incur maintenance capex, which normally generates substantial amount of cash flows), which ultimately can understate/overstate the company s valuation. The core business (power transmission) generates a valuation of Rs127/share and the remaining Rs 5/share is derived from investments, OTSS bonds and cash on the company s books. Exhibit 1: SOTP valuation based on FY14E financials Valuation Rsmn Multiple (x) Value per share Value of regulated equity 588, Value of JVs/subsidiaries (Powerlinks transmission) 2, OTSS 3, Cash on books 17, Total 611, Current market price (CMP) % upside % Source: Nirmal Bang Institutional Equities Research Exhibit 2: Our estimates versus Bloomberg consensus projections (Rsmn) FY13E FY14E Y/E March NBIE Consensus (%) NBIE Consensus (%) Net revenue 121, ,750 (1.5) 148, , EBITDA 102, ,716 (2.0) 125, , EBITDA margin (%) (40) bps (30) bps PAT 37,472 37,800 (0.9) 45,407 44, PAT margin (%) bps bps EPS (Rs) Source: Bloomberg, Nirmal Bang Institutional Equities Research 2 Power Grid Corporation of India

4 Oct-07 Oct-07 Jan-08 Jan-08 Apr-08 Apr-08 Jul-08 Jul-08 Oct-08 Oct-08 Jan-09 Jan-09 Apr-09 Apr-09 Jul-09 Jul-09 Oct-09 Oct-09 Jan-10 Jan-10 Apr-10 Apr-10 Institutional Equities Jul-10 Jul-10 Oct-10 Oct-10 Jan-11 Jan-11 Apr-11 Apr-11 Jul-11 Jul-11 Oct-11 Oct-11 Jan-12 Jan-12 Apr-12 Apr-12 Jul-12 Jul-12 Exhibit 3: PE chart (x) Average PE: 18.7 Source: BSE, Nirmal Bang Institutional Equities Research Exhibit 4: P/BV chart (x) Average P/BV: Exhibit 5: Comparative valuation FY13E Source: BSE, Nirmal Bang Institutional Equities Research Comparative valuation CMP Mkt cap EPS growth Sales growth Book RoE P/BV P/E Currency (Rsbn) (%) (%) value (%) (x) (x) Power Grid Corporation of India INR NTPC ,313.5 INR NHPC INR Redes Energeticas Nacionais Euro 13.6 (9.2) National Grid Plc GBP Terna Rete Electtrica Nazionale Euro ITC Holding Corp USD Source: Bloomberg, Nirmal Bang Institutional Equities Research Exhibit 6: Comparative valuation FY14E Comparative valuation CMP Mkt cap EPS growth Sales growth Book RoE P/BV P/E Currency (Rsbn) (%) (%) value (%) (x) (x) Power Grid Corporation of India INR NTPC ,313.5 INR NHPC INR Redes Energeticas Nacionais Eur National Grid Plc GBP (0.6) Terna Rete Electtrica Nazionale Eur ITC Holding Corp USD Source: Bloomberg, Nirmal Bang Institutional Equities Research 3 Power Grid Corporation of India

5 Rating Rationale Higher capex to ensure growth PGCIL, a central transmission utility, embarked upon an aggressive expansion plan over the 11 th Five Year Plan (FY08-12) to augment India s power T&D infrastructure. The company incurred capex amounting to Rs550bn during the 11 th Plan period; thereby adding 34,000 circuit kilometres (ckm) of transmission line (79% higher than 19,000 ckm added under the 10 th Plan) and 66,000MVA transformation capacity (164% higher than 25,000MVA added under the 10 th Plan). As the emphasis on integrating India s T&D network increases, PGCIL further earmarked a capex outlay of Rs1trn under the 12 th Plan (FY13-17), 82% higher compared to Rs550bn capex incurred under the 11 th Plan (FY08-12). This would lead to robust growth for PGCIL, as its earnings are linked to capex and the rate of capitalisation of transmission assets due to its regulated equity business model. The planned capex of Rs1trn is meant for expansion of inter-regional power transmission system, strengthening of existing grids, creating a national grid and providing transmission linkages for power generation projects of the central sector, independent power plants (IPPs) of the private sector and ultra mega power projects (UMPP). Moreover, 58% of the 12 th Plan capex (Rs581bn out of Rs1trn) is likely to be committed via nine high capacity power transmission corridors (HCPTC) for which PGCIL has already started the bidding process. Exhibit 7: PGCIL Investment programme under 12 th Plan Projects / schemes Capex planned (Rsbn) Central sector generation 225 UMPP 140 IPP 520 Grid strengthening 115 Total 1,000 Exhibit 8: Planned high capacity power transmission corridor (HCPTC) Transmission system association Amount (Rsbn) HCPTC 1 Phase 1 generation project in Orissa 87.5 HCPTC 2 IPP projects of Jharkhand 57.1 HCPTC 3 IPP projects of Sikkim 13.0 HCPTC 4 IPP projects of Madhya Pradesh and Bilaspur, Chhattisgarh 12.4 HCPTC 5 IPP projects of Chattisgarh HCPTC 6 IPP projects of Krishnapatnam, Andhra Pradesh 20.7 HCPTC 7 IPP projects of Tuticorin, Tamil Nadu 23.6 HCPTC 8 IPP projects of Srikakulam, Andhra Pradesh 29.9 HCPTC 9 IPP projects of southern region 48.2 Total Power Grid Corporation of India

6 Exhibit 9: HCPTC geographical map Source: Company Rising investments in power transmission space - PGCIL is biggest contributor Due to huge peak power deficit the focus of the power ministry, over the years, was always on investing more in power generation to bridge the demand-supply gap. As a result, the power T&D space remained neglected. Worldwide, the investment in power generation and power T&D has always been equal - in the ratio of 1:1, but in India power T&D gets only 50% of the investment earmarked for power generation. As a result, the T&D system is saddled with deficiencies, leading to high T&D losses. However, the need for strong and reliable transmission network to handle inter-regional transfer of power as well as trading of merchant power is rising; as a result, the transmission sector is beginning to attract more investment. Under the 12 th Plan, Rs1,800bn investment is planned for the transmission sector (29% jump over Rs1,400bn planned under 11 th Plan). Under the 13 th Plan, the transmission sector investment outlay is expected to be Rs2,300bn, 28% higher than the preceding Plan s target. PGCIL, being the nodal government agency responsible for planning and developing the nationwide transmission network, will be the biggest contributor to planned capex. The company successfully achieved its capex target of Rs550bn under the 11 th Plan even though the generation capacity addition target was missed (68% of planned addition of 78,700MW achieved). PGCIL s contribution to total transmission capex of 11 th Plan works out to 39%. Considering its superior performance over the years in achieving the planned capex (Exhibit 11), PGCIL has been entrusted with 55% of total transmission capex target of the 12 th Plan. 5 Power Grid Corporation of India

7 Exhibit 10: Planned investment in power transmission sector (Rsbn) 2,500 2,300 2,000 1,800 1,500 1,400 1, th plan 12th plan 13th plan Source: CEA, Company, Nirmal Bang Institutional Equities Research Exhibit 11: PGCIL Capex achievement rate (Rsbn) FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 Target capex Actual capex We forecast capex of Rs924bn over the next five years Considering PGCIL s strong track record of project execution and the fact that 76% of planned capex of Rs1trn has already received investment approval, we forecast total capex outlay of Rs924bn until FY17. The fact that contracts of sub-vendors for Rs670bn worth of projects have already been approved is a further comforting factor. Based on planned transmission capacity addition over FY13-15E, we expect capex under the 12 th Plan to be front-ended (higher quantum in the initial years) as opposed to previous Plans where capex was back-ended. 6 Power Grid Corporation of India

8 Exhibit 12: PGCIL Investment approval status of Rs1trn capex 24% 76% Approval received (Rs760bn) Approval pending (Rs240bn) Exhibit 13: 12 th Plan capex Target versus our estimate (Rsbn) FY13E FY14E FY15E FY16E FY17E Target capex Relative immunity likely Our expectation The risk of PGCIL s earnings being affected due to delay in commissioning of linked power generation plant has subsided. There have been instances where the regulator has allowed them to recover past arrears when transmission assets have got commissioned despite the delay in generation assets. PGCIL has been able to recover the tariff in projects like Kudankulam nuclear plant, Barh-Baliya transmission line, Koldam hydel project, Dulhasti hydel project etc where the linked power generation project has been delayed. PGCIL has also been allowed diversion for inter-region power transfer to southern markets when the work on Krishnapatnam generation project stopped. Using these as precedence, PGCIL is likely to remain insulated in future in generating transmission income in similar cases, thereby mitigating the risk arising out of delay in power generation. 7 Power Grid Corporation of India

9 Rising capitalisation to enhance RoE Healthy capitalisation likely in FY13-14E Along with the rise in capex spending, PGCIL s emphasis on time bound and robust execution of power transmission projects has resulted in a rapid increase in the rate of capitalisation over the past two years. Under the fixed RoE business model, capitalisation of transmission assets is the core valuation driver as it enhances regulated equity of the company eligible for earning Central Electricity Regulatory Commission (CERC) determined RoE of 15.5%. Considering the huge capex planned over the 12 th Plan, the sharp rise in order placement activity as well as the urgent need of integrating India s power T&D network by creation of a national grid, we are upbeat about PGCIL maintaining its healthy capitalisation run rate over FY13-17E. We expect capitalisation to be front-ended (higher quantum in the initial years) based on the planned transmission capacity addition over FY13-15E. Consequently, we expect capitalisation of transmission assets worth Rs169.7bn/Rs171.8bn in FY13E/14E, respectively. During the 12 th Plan period, we expect capitalisation of Rs840.8bn compared to Rs347.2bn capitalised over the 11 th Plan period, a growth of 142%. Exhibit 14: Capex and capitalisation trend (Rsbn) FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E Capex Capitalisation Regulated equity to register 23.2% CAGR over FY12-15E Rising capitalisation will lead to stronger growth in regulated equity eligible for earning fixed RoE. We expect 23.2% CAGR in regulated equity over FY12-15E compared to 17.6% CAGR achieved over FY We expect addition of Rs50.9bn/Rs51.5bn/Rs51.9bn to regulated equity in FY13E/FY14E/FY15E, respectively. This will lead to a sharp jump in the regulated equity base - from Rs177.8bn in FY12 to Rs332.2bn in FY15E, registering a CAGR of 23.2%. Exhibit 15: Trend in regulated equity (Rsbn) % CAGR % CAGR FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E 8 Power Grid Corporation of India

10 Driving up reported RoE to 15.7% in FY14E The company s higher growth capex didn t match with the increase in capitalisation, leading to significant jump in CWIP, which ultimately kept the reported RoE suppressed. With the capitalisation set to increase over FY12-15E, regulated equity is expected to show a sharp rise, leading to improvement in reported RoE of the company. As seen in Exhibit 16, we expect capital WIP as a percentage of gross block to fall from 44.5% in FY12 to 32.8% in FY14E, driven by capitalisation of transmission assets worth Rs169.7bn/Rs171.8bn in FY13E/14E, respectively. Consequently, reported RoE of PGCIL is expected to rise from 13.9% in FY12 to 15.7% in FY14E, reflecting a perfect inverse correlation with capital WIP as a percentage of the gross block (Exhibit 17). Exhibit 16: Trend in gross block and capital WIP (Rsbn) (%) 1, , FY10 FY11 FY12 FY13E FY14E Gross Block (LHS) Capital WIP (LHS) Capital WIP as % of GB (RHS) Exhibit 17: Inverse correlation of RoE, capital WIP (%) (%) FY10 FY11 FY12 FY13E FY14E RoE (%) (LHS) Capital WIP as % of Gross Block (RHS) 25 9 Power Grid Corporation of India

11 Proposed JV with SEBs is an attractive proposition PGCIL is the nodal agency for undertaking inter-state power transmission projects, but the responsibility for intra-state (within the state) transmission projects lies with the state electricity boards (SEBs) of respective states. While lining up the T&D infrastructure in their states, many SEBs opt for consultancy services of PGCIL in order to benefit from its vast experience and expertise. Under the 12 th and 13 th Plans, investments worth Rs550bn and Rs950bn, respectively, have been planned to strengthen the intra-state transmission network. This investment will be committed by respective SEBs. Considering the weak financial health of SEBs, PGCIL has proposed a joint venture (JV) model wherein PGCIL will pick up an equity stake in the JV to undertake projects jointly with SEBs. This will lower the financial contribution that SEBs will have to make to implement the transmission projects as well as enable PGCIL to tap the significant opportunity being thrown up in the intra-state domain. Exhibit 18: Transmission capex break-up (Rsbn) 12 th and 13 th Plan ,250 1,350 Inter-state intra-state Inter-state intra-state Exhibit 19 PGCIL JVs with private sector PGCIL has already ventured into the JV route with private sector firms by picking up minority stake in JV companies formed to execute specific transmission projects (Exhibit 19). Two of the six JVs, Powerlinks Transmission with Tata Power and Torrent Power Grid with Torrent Power, are already operational while the remaining four are at the construction stage. PGCIL is eyeing a similar business model with SEBs as well and is already in talks with nine states Uttar Pradesh, Bihar, Orissa, Jharkhand, Chhattisgarh, Madhya Pradesh, Karnataka, Tamil Nadu and Manipur. Considering the significant investment planned for intra-state transmission projects, we believe this can turn out to be an attractive business proposition for PGCIL. JV company s name PGCIL holding JV partner Transmission line Teesta Valley Power Transmission 26% Teesta Urja 1,200 MW Teesta-III HEP Powerlinks Transmission 49% Tata Power Tala HEP, East-North interconnector and northern region transmission system North Eastern Transmission Co 26% ONGC Tripura Power Project Co 726 MW Palatana gas-based power project, Tripura Torrent Power Grid 26% Torrent Power 1,100MW gas based project (Sugen) at Akhakhol in Surat, Gujarat Parbati Koldam Transmission Co 26% Reliance Infrastructure Parbati-II (800 MW) HEP and Koldam (800 MW) HEP Jaypee Powergrid 26% Jaiprakash Power Ventures 1,000 MW Karcham Wangtoo HEP project in Kinnaur district of Himachal Pradesh Equity shortfall can be met via higher leverage PGCIL has planned capital expenditure worth Rs1,000bn (NBIE estimate Rs924bn) under the 12 th Plan (FY13-17) which is 1.8x higher than 11 th Plan target of Rs550bn (FY08-12). Based on our capex estimate (Scenario 1 Exhibit 20), the equity requirement for next two years works out to Rs108bn (FY14E debt-equity ratio assumed at 73:27) together with debt repayment of Rs57bn for the next two years (total debt repayment for next three years stands at Rs93bn). This would lead to equity shortfall of Rs3.5bn in FY13E. However, we believe the company would be able to finance the equity requirement for FY13E from the cash on its books of Rs15.8bn as on FY12 (excluding follow-on public offer money of Rs7.5bn). However, for FY14E, there would be an equity shortfall of Rs5.4bn in case PGCIL keeps its debt-equity ratio at 70:30. We believe the company would prefer to finance its equity shortfall by increasing its leverage rather than opting for fresh equity dilution. Subsequently, we expect PGCIL to raise its debt-equity ratio from 70:30 to 73:27 in FY14E and factor in the same in our model. 10 Power Grid Corporation of India

12 Considering Scenario 2 (Exhibit 21) where PGCIL achieves its full capex target of Rs1,000bn under the 12 th Plan with a debt-equity ratio of 70:30 - the equity shortfall would only be Rs6.3bn/Rs5.2bn in FY13E/FY14E respectively, which we feel PGCIL would finance by raising its leverage rather than diluting fresh equity considering the healthy internal accruals the company is likely to generate during the 12 th Plan (FY13-17). According to the regulator, transmission assets are financed in the debt/equity ratio of 70:30 (however, the equity ratio can be less than 30) and the debt covenant with lenders also allows financing the transmission project in ratio of 80:20. The PGCIL management s commentary also suggests that it will meet the equity requirement for FY13 and FY14 via higher cash flows that would be generated due to robust capitalisation and the remaining shortfall would be met by raising the leverage. Exhibit 20: Scenario 1 Equity shortfall based on our capex assumption Particulars (Rsmn) FY13E FY14E FY15E FY16E FY17E Capex 190, , , , ,500 Debt-equity ratio assumed Equity required (A) 57,000 51,300 54,450 54,450 54,450 PAT + depreciation 69,086 84, , , ,463 Dividend payout (13,059) (15,824) (18,883) (21,812) (24,832) Debt repayment (26,035) (30,733) (36,131) (42,818) (47,251) Change in working capital 12,398 9,427 7,990 4,730 7,023 Net internal accruals 42,389 47,404 53,872 56,718 67,403 Deffered tax recovery 3,643 4,415 5,268 6,085 6,927 FPO money 7, Cash available for equity contribution (B) 53,532 51,819 59,139 62,803 74,330 Equity shortfall (A-B) (3,468) 519 4,689 8,353 19,880 Exhibit 21: Scenario 2 Equity shortfall based on PGCIL s target capex Particulars (Rsmn) FY13E FY14E FY15E FY16E FY17E Capex 200, , , , ,000 Debt-equity ratio assumed Equity required (A) 60,000 57,000 60,000 60,000 63,000 PAT + depreciation 69,156 84, , , ,602 Dividend payout (13,060) (15,822) (18,922) (21,938) (25,095) Debt repayment (26,035) (31,083) (36,179) (43,547) (48,624) Change in working capital 12,496 9,533 8,215 5,162 7,663 Net internal accruals 42,556 47,347 54,529 57,453 68,546 Deffered tax recovery 3,644 4,414 5,279 6,120 7,001 FPO money 7, Cash available for equity contribution (B) 53,699 51,761 59,807 63,574 75,547 Equity shortfall (A-B) (6,301) (5,239) (193) 3,574 12,547 Exhibit 22: Sensitivity of equity shortfall to capex and commissioning FY13E (Rsmn) Capex Commissioning 140, , , , ,000 9,896 3,902 (2,091) (8,084) 160,000 10,985 4,992 (1,001) (6,995) 180,000 12,075 6, (5,905) 200,000 13,164 7,171 1,178 (4,815) Source: Nirmal Bang Institutional Equities Research FY14E (Rsmn) Capex Commissioning 140, , , , ,000 7,910 1,937 (4,036) (10,009) 160,000 9,016 3,043 (2,930) (8,903) 180,000 10,121 4,148 (1,825) (7,798) 200,000 11,227 5,254 (719) (6,693) 11 Power Grid Corporation of India

13 The move towards a national grid Augmentation of inter-regional capacity to reduce deficits The capacity addition (54GW added in the 11th Plan) and growth in inter-regional capacity (13GW added under the 11th Plan, 13% CAGR over FY08-FY12) has helped in reducing deficits across regions in the past two-three years. It is expected that, at the end of 12th Plan, each region would be connected to an adjacent region through at least two high capacity synchronous 400KV or 765KV lines and a HVDC bipole/back-to-back link. According to the CEA, four grids viz. Northern, Western, Eastern and North-Eastern with a capacity of about 133GW have been synchronized with one another while the remaining Southern grid (49GW) is expected to be synchronized with these grids by Total capacity of the integrated all-india grid is expected to be of the tune of 300GW, including about 40-50GW of renewable generation, in the next five-six years. The increase in inter-regional capacity (CEA estimates 37GW addition under the 12th Plan period) would cater to full utilisation of capacity from a cluster of coal-fired generation projects, mainly in pit-head and coastal areas, while the hydro-generation potential in the northeast region which would help in capping the peak deficits among the regions. Capacity addition in the 12th Plan period (FY13-17), as per the CEA, is expected to be 80GW (around 100GW is under construction) and to evacuate power from these upcoming generation capacities requires a high capacity transmission system up to the load centres. Exhibit 23: Region-wise power deficit (%) FY08 FY09 FY10 FY11 FY12 Northern region Western region Southern region Eastern region North east region Source: CEA, Nirmal Bang Institutional Equities Research Exhibit 24: Region-wise evacuation scheme for generation projects 12 th Plan, early part of 13 th Plan Region Capacity (MW) Northern region 24,144 Western region 35,610 Southern region 38,528 Eastern region 52,235 North east region 4,984 Total 155,501 Source: CEA, Nirmal Bang Institutional Equities Research Exhibit 25: Transmission line additions planned under 12 th Plan Transmission lines (Both AC & HVDC) Ckm End of 10th Plan End of 11th Plan Expected by end of 12th Plan Addition under 12th Plan HVDC bi-pole lines 5,872 10,844 18,872 8, KV 1,704 7,287 31,616 24, KV 75, , ,961 33, KV 114, , ,782 36,380 Total 197, , , ,343 Source: CEA, Nirmal Bang Institutional Equities Research 12 Power Grid Corporation of India

14 Exhibit 26: Transformation capacity addition planned under 12 th Plan Sub-stations(AC) & HVDC Expected by the Addition under End of 10th Plan End of 11th Plan terminals ( MVA/MW) end of 12th Plan 12th Plan HVDC 8,000 11,200 26,500 15, kv - 25, , , kv 92, , ,887 46, kv 156, , ,574 73,766 Total 257, , , ,426 Source: CEA, Nirmal Bang Institutional Equities Research Exhibit 27: Inter-regional capacity addition planned under 12 th Plan (MW) Inter-regional transmission capacity End of 10th Plan End of 11th Plan Addition during 12th Plan Expected by the end of 12th Plan Regions ER-SR 3,130 3,630-3,630 ER-NR 3,430 10,030 7,900 17,930 ER-WR 1,790 4,390 8,400 12,790 ER-NER 1,260 1,260 1,600 2,860 NR-WR 2,120 4,220 10,200 14,420 WR-SR 1,720 1,520 6,400 7,920 NER/ER-NR/WR - - 6,000 6, /110kV radial links Total - All India 14,050 28,000 37,550 65,550 Source: CEA, Nirmal Bang Institutional Equities Research Southern region faces maximum volatility in power exchange trade The increase in inter-regional capacity has so far been able to keep a check on the price movement on power exchanges among the four connected regions (N-W-E-NE). The inter-regional energy exchange volumes (21% CAGR over FY09-12) have grown significantly in the past three years. The southern region faces the maximum volatility in power prices on the exchanges due to the constraints such as non-availability of transmission corridor and limited inter-regional capacity. The power exchanges (India Energy Exchange or IEX) have always witnessed transmission constraints as over the counter/bilateral contracts are given preference to book corridors for monthly and weekly power contracts ahead of them. The power exchanges still post volume loss of 24-28% every month of the scheduled volume due to transmission constraints. Recently, the regulator (CERC) granted separate transmission corridor until June 2013 to Karnataka as it was not able to wheel in the power as Tamil Nadu tried to block the evacuation corridor in order to meet its demand. We believe the ramp-up in inter-regional capacity and transmission corridors will increase the inter-regional energy exchange volume and help develop the power exchange market (currently 10% of traded volume as a percentage of total generation) which would ultimately lead to a better price discovery mechanism. Exhibit 28: Inter-regional energy exchange volume Year FY09 23,405 FY10 26,464 FY11 34,818 FY12 41,635 Source: CEA, Nirmal Bang Institutional Equities Research Exhibit 29: FY12 Inter-regional energy exchange volume (MU) Region North Western South East North East Total Exports North NA 1,736 1,129 1, ,908 Western 8,229 NA 4,551 1, ,846 South NA ,663 East 12,091 3,451 2,473 NA 1,616 19,632 North East NA 586 Total Import 21,268 5,431 8,697 2,548 3,691 41,635 Source: CEA, Nirmal Bang Institutional Equities Research MU 13 Power Grid Corporation of India

15 Exhibit 30: Merchant power tariff in southern region versus other regions (Rs/kwh) Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 South Other regions Source: IEX, Nirmal Bang Institutional Equities Research Open access: The 1MW conundrum The power ministry vide its letter dated 30 November 2011 operationalised the open access to consumers with a power requirement of 1MW & above. In April 2012, the ministry issued directives (under Section 107 of The Electricity Act 2003) to CERC stating that the state regulators (SERCs) have no jurisdiction to decide energy tariff for such consumers. The state regulators will only be required to calculate the cross subsidy and wheeling charges. The power distribution companies (discoms) dissuaded the implementation of open access due to the fear of losing key industrial customers, seeking further clarity on issues like reliability charge, separate feeders for open access consumers etc. Recently, many states have reduced cross subsidy charges in order to promote open access. As per our discussions with the CERC, even though the cross-subsidy charges have been reduced by many states in order to increase the open access, its implementation is limited and it depends on state discoms as to how they perceive the open access cross-subsidy and other charges with respect to cross-subsidising industrial consumers. We believe the implementation of open access system will increase incremental volume across regions and discoms will continue to get compensated by cross-subsidy charges and other charges, thereby making the electricity market competitive. In order to limit regional peak power deficits, reducing T&D losses and maintaining grid discipline via supporting the upcoming generation capacity along with renewable capacity addition augur well for higher transformational capacity in the 12 th Plan (FY13-17). 14 Power Grid Corporation of India

16 Exhibit 31: Comparison of cost of power through intra-state open access and distribution utility (Rs/kwh) Effective OA * Net OA **Net cost of power *** Tariff State charges charge from OA (Discom) Difference Assam Chhattisgarh (short-term) Haryana (0.59) Himachal Pradesh Karnataka (BESCOM) - ST (0.96) Maharashtra (MSEDCL area) - LT (0.94) Orissa ( WESCO) Punjab ( short term) (0.44) Rajasthan (0.10) Uttar Pradesh ( short -term) (0.76) Madhya Pradesh - ST (0.63) Uttarakhand ( long-term) Gujarat - LTOA (3.12) West Bengal (short-term) Tamil Nadu Delhi Jharkhand Andhra Pradesh Kerala Bihar ( HTS) Source: Forum of regulator, Nirmal Bang Institutional Equities Research Note: * OA charges for a consumer of 5MW at 11 KV (33 KV in some cases) seeking OA for a month. ** This includes transmission and wheeling losses calculated assuming power purchase cost as Rs 3/kWh *** Tariff for an embedded consumer of 5MW at 11KV (33KV in some cases). 15 Power Grid Corporation of India

17 Financials Revenue to surge on elevated capitalisation run-rate We expect revenue CAGR of 20% over FY10-FY14E on the back of improvement in capitalisation runrate. We expect capitalisation of Rs170bn/Rs172bn in FY13E/FY14E, respectively, which would enhance the regulated equity base (25% CAGR over FY10-14E) of PGCIL. The company gets assured 15.5% RoE on its regulated equity base, thereby keeping the profitability intact. Exhibit 32: Revenue and regulated equity trend Rsbn FY10 FY11 FY12 FY13E FY14E Regulated equity Addition to regulated equity Core transmission revenue Growth (%) Exhibit 33: Capitalisation trend (Rsbn) (%) FY10 FY11 FY12 FY13E FY14E Capitalisation (LHS) Regulated Equity (LHS) Capitalisation run rate (RHS) Exhibit 34: Segment-wise revenue break-up % Revenue break up FY10 FY11 FY12 FY13E FY14E Transmission income Income from short-term open access Consultancy services Total telecom revenue Spread to narrow down between RoE, core transmission RoE PGCIL s RoE was under stress until FY11 due to higher growth capex, which did not correspond with higher capitalisation of transmission assets and lead to higher CWIP. In FY12, the RoE expanded to 13.9% due to the higher capitalisation rate despite incurring the highest ever capex in a financial year. We believe that now due to the increase in capitalisation rate (which will remain front-ended) the company s RoE will start inching up (14.5% in FY13E and 15.7% in FY14E) towards core transmission RoE of over 16% (including incentives) Power Grid Corporation of India

18 Exhibit 35: RoE trend (%) FY09 FY10 FY11 FY12 FY13E FY14E RoE Core RoE Exhibit 36: Revenue, RoE trend Rsbn FY10 FY11 FY12 FY13E FY14E Transmission revenue STOA revenue Consultancy revenue Telecom revenue RoE (%) Core transmission RoE (%) Collection from debtors improves The company s debtor days improved significantly in FY12, to 85 from 137 in FY11. Collection from debtors improved due to factors like approval of pending tariff by the regulator (In FY11, unbilled revenue worth Rs20bn was due to approval for tariff plan kept pending by the regulator), and improvement witnessed in the payment cycle of state electricity boards. According to the management, all SEBs are paying on time except the SEBs of Uttar Pradesh, Rajasthan and Delhi amounting to Rs3.0bn, while around Rs1.5bn is stuck in litigation due to the change in the transmission pricing methodology to the POC (point of connection) regime. SEBs have gone for significant tariff hike and regular filing of tariff petition, which will improve their financial health. The government is in the final stage of finalising a bailout plan for SEBs, which would further ease the financial strain on their balance sheets. We believe the debtor days of PGCIL will come down further (remain above the average collection period of 60 days), thereby easing the working capital requirement. 17 Power Grid Corporation of India

19 Apr-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Institutional Equities Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Exhibit 37: Tariff hike by states in FY11 (%) Exhibit 38: Tariff hike by states in FY12 (%) State Issued Date Tariff Hike (%) Gujarat Apr Uttar Pradesh Apr Punjab Apr-10 8 Uttarakhand Apr-10 3 West Bengal Apr Jammu & Kashmir Apr Jharkhand May Himachal Jun Madhya Pradesh Jun Tami l Nadu Aug Andhra Pradesh Aug-10 4 Maharashtra Sep-10 3 Haryana Oct Karnataka Dec-10 6 Mizoram Jan Manipur Feb Andhra Pradesh Mar Orissa Mar Chhattisgarh Mar Source: SERC, Nirmal Bang Institutional Equities Research Bond proxy State Issued Date Tariff Hike (%) Bihar May Haryana May Nagaland Jun Himachal Pradesh Jun-11 9 Jharkhand Jul Madhya Pradesh Jul-11 6 Delhi Aug Punjab Sep-11 9 Rajasthan Sep Gujarat Sep-11 4 Jammu & Kashmir Oct Maharashtra Oct Karnataka Oct-11 7 Andhra Pradesh Dec Tamil Nadu Mar Bihar Mar Madhya Pradesh Mar-12 7 Source: SERC, Nirmal Bang Institutional Equities Research PGCIL s valuation is linked to the spread between its RoE and a 10-year bond yield. As we expect the RoE of the company to improve in FY13E and FY14E, the spreads are likely to expand, indicating improvement in the valuation going forward. We expect a 93bps and 127bps expansion in the spread on FY13E and FY14E RoE and a 10-year bond yield (assuming bond yield as constant). However, if the interest rate softens, it will become statistically favourable for PGCIL, leading to further expansion in the spread and thereby a higher valuation. Exhibit 39: 10-year bond yield and RoE spread (%) year bond yield Spread Source: Bloomberg, Company, Nirmal Bang Institutional Equities Research 18 Power Grid Corporation of India

20 Consultancy and telecom segments to remain steady PGCIL offers consultancy services to domestic as well as international clients for undertaking power T&D projects, thereby leveraging on the in-house expertise developed by it. Consultancy income mainly comprises fees from Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY), the execution of transmission and communication system-related projects on a turnkey basis and technical consulting assignments for Indian state utilities and utilities in other countries. It also offers project management and supervision services once the transmission project becomes operational. As of end FY12, 116 domestic assignments for projects worth Rs190bn and 19 international assignments for projects worth Rs105bn were under execution by PGCIL s consultancy division. Internationally, countries in the SAARC, Africa and Gulf region are key focus geographies while domestically its clientele includes central PSUs, SEBs, government organisations (like Indian Navy, Indian Railways) and private sector firms (both in power generation as well as T&D space). Smart grid in Haryana and Chhatisgarh as well as laying of optical ground wire network (OPGW) in J&K are among the major consultancy projects completed by PGCIL. The consultancy segment reported revenue of Rs2.9bn in FY12, accounting for 2.9% of its total revenue. We are factoring in moderate revenue CAGR of 3% over FY12-14E in our estimates. In telecom segment, PGCIL has a presence in two business activities: (a) Fibre optic business, and (b) Tower leasing business. PGCIL has established broadband telecom network of 25,000km, connecting over 110 cities on its extensively spread transmission infrastructure. It is the only utility in the country having overhead optic fibre on its extra high voltage transmission network. It has a licence to provide telecom services like National Long Distance (NLD), Internet Service Provider (ISP) Category-A and Infrastructure Provider Category I (IP-I). Its clientele includes major telecom players, MNCs, BPOs, government organisation and media as well as corporates. PGCIL is also partnering with the Government of India (GoI) in the implementation of the National Knowledge Network (NKN) project and the National Optic Fibre Network (NOFN) project. The NKN project - aimed at connecting knowledge centres across India - has total project cost of Rs60bn of which PGCIL s revenue share is Rs9bn, which is to be realised over a period of 10 years. The NOFN project is aimed at connecting gram panchayats where PGCIL s share in the project is worth Rs40bn over the life of the project (it will connect 50,000 out of 2,50,000 panchayats). The project is still at a nascent stage as PGCIL has recently started the task of connecting 17 gram panchayats in Vizag, Andhra Pradesh. In order to maximise its revenue streams, PGCIL found an innovative business idea of leasing its transmission towers to telecom service providers for mounting telecom antennae. It has leased 800 transmission towers till date, generating revenue of Rs515mn over a period of 10 years. The telecom segment accounted for revenue of Rs2bn in FY12, thus contributing 2% to total revenue. We forecast 5% CAGR in telecom segment revenue over FY12-14E. Key risks Any change in regulated RoE for the next tariff block ( CERC norms) can lead to change in the earnings of PGCIL. Exhibit 40: Scenario analysis for FY15E - Impact of change in regulated RoE Regulated RoE (%) EPS for FY15E (Rs) Reported RoE for FY15E (%) Source: Nirmal Bang Institutional Equities Research The earnings of the company are sensitive to capex and capitalisation of power transmission assets. 19 Power Grid Corporation of India

21 Annexure Schedule of upcoming transmission projects FY13E Common Scheme for 765KV Pooling Station and Network Associated with DVC & Maithon RB Project etc and Import by NR & WR via ER 1,914 Supplementary Transmission System Associated with DVC & Maithon Right Bank Project 445 Transmission System of Vidhyanchal-IV and Rihand -III (1000MW each) generation project 3,491 Northern Region System Strengthening Scheme -XV 218 Northern Region System Strengthening Scheme - XVIII 186 Northern Region System Strengthening Scheme - XIX 184 Transmission System Associated with RAMPUR HEP KV System for Central Part of Northern Grid - PART-I 316 Northern Region System Strengthening Scheme-XIII KV System for Central Part of Northern Grid - PART-III 507 System Strengthening in Northern Region for SASAN & MUNDRA (UMPP) 513 Northern Regional Transmission Strengthening Scheme 582 Western Region Strengthening Scheme - II (Balance) 2,098 Western Region Strengthening Scheme - V 80 Transmission System Associated with Sasan Ultra Mega Power Project 3,456 Western Region Strengthening Scheme - XI 306 Mauda Transmission System 246 Split Bus Arrangement & Reconfiguration / Shifting of terminating lines at 400KV Raipur substation 15 Kaiga 3 & 4 Trans. System (Balance Line) 176 Kundankulam - APP Trans. System (Balance line) 400 System Strengthening - XI of SR 64 Transmission System Associated with KALPAKKAM PFBR (500 MW) 28 System Strengthening - XII of SR 137 Eastern Region Strengthening Scheme I 146 Immediate evacuation system for NABINAGAR TPS 37 Transmission System for Transfer of Power from Generation Project in SIKKIM to NR/WR Part - A 200 Transmission System for Phase-I Generation Projects in ORISSA - Part - A 1,557 Interconnection Between Electrical Grid of India and Bangladesh-India Portion 121 Total 17,999 Rsmn 20 Power Grid Corporation of India

22 FY14E Transmission System for Phase-I Generation Projects in Orissa - Part - B 2,207 Transmission System for Phase-I Generation Projects in Orissa - Part - C 2,140 Northern Regional System Strengthening Scheme - XVI 591 Northern Regional System Strengthening Scheme - XXI 1,292 Northern Regional System Strengthening Scheme - XXII 158 Transmission System Associated with Mundra Ultra Mega Power Project 2,136 Establishment of Pooling Station at Raigarh (Kotra) and Raipur for IPP generation project in Chhatisgarh - A 1,288 Transmission System for establishment of 400/220KV GIS Substation at Kala in UT DNH 137 Integration of Pooling Station in Chhattisgarh with Central part of WR for IPP Generation Projects in Chhatisgarh-C 1,209 Transmission System for Connectivity of MB Power Limited 376 Transmission System for IPP Generation Projects in Madhya Pradesh and Chhatisgarh 1,233 Western Region Strengthening Scheme - XIII 49 Transmission System for establishment of 400/220KV GIS substation at Magarwada in UT DD 252 Supplementary Transmission System Associated with Vallur TPS 134 Transmission System Associated with Krishnapatnam UMPP Part - A 421 Eastern Region Strengthening Scheme - III 981 Transmission System for Transfer of Power from Generation Project in SIKKIM to NR/WR Part - B 1,312 Transmission System for Phase-I Generation Projects in Jharkhand and West Bengal - Part - A 495 Total 16,412 (Rsmn) FY15E North East/Northern Western Interconnector -I Project 6,628 Immediate evacuation system with BARH - II TPS 849 Transmission System for Phase-I Generation Projects in Jharkhand and West Bengal - Part - A2 2,350 Transmission System Associated with Krishnapatnam UMPP - Part - B 1,910 Northern Regional System Strengthening Scheme - XXIV 683 Establishment of Pooling Station at Champa and Raigarh (near Tamnar) for IPP generation project in Chhatisgarh - B 1,693 Trans. System strengthening in Western part of WR for IPP Generation Projects in Chhatisgarh - part-d 1,944 System Strengthening in North/West part of WR for IPP Project in Chhattisgarh Part - E 1,699 System Strengthening in Raipur - Wardha Corridor for IPP Project in Chhattisgarh - Part - F 1,328 System Strengthening in Wardha - Aurangabad Corridor for IPP Project in Chhattisgarh. Part-G 1,218 Transmission System for connectivity of Essar Power Gujarat Limited 514 Common System Associated with ISGS Projects in Krishnapatnam area of Andhra Pradesh 1,464 Common System Associated with Costal Energen Private Ltd and Ind-Barath Power Ltd. (LTOA) generation project in Tuticorin area Part - B 1,742 System Strengthening - XIII of SR Grid 436 System Strengthening in SR - XIV 276 Common System Associated with Costal Energen Private Ltd and Ind-Barath Power (Madras) Ltd. (LTOA) Gen. project in Tuticorin area Part - A 90 Transmission System Associated with Krishnapatnam UMPP - Part - C1 323 Transmission System for Connectivity of Thermal Powertech Corporation (I) Ltd 97 Common Trans. Scheme Associated with ISGS Project in Vemagiri Area of Andhra Pradesh-Part-A1 185 Transmission System for Development of Pooling Station in NR, Part of West Bengal and transfer of power from Bhutan to NR/WR 4,150 Total 29,579 (Rsmn) 21 Power Grid Corporation of India

23 Financials Exhibit 41: Income statement Y/E March (Rsmn) FY10 FY11 FY12 FY13E FY14E Net Sales 71,275 83, , , ,496 % growth Staff cost 7,267 7,459 8,430 9,753 11,880 Other overheads 5,314 5,915 8,100 9,509 11,583 Total expenditure 12,581 13,374 16,530 19,261 23,462 EBITDA 58,694 70,513 83, , ,034 % growth EBITDA margin (%) Other income 3,759 6,709 7,497 5,143 5,910 Interest 15,432 17,339 19,433 24,130 28,752 Gross profit 47,021 59,883 71,888 83, ,192 % growth Depreciation 19,797 21,994 25,725 31,614 39,127 Profit before tax 27,224 37,889 46,163 52,044 63,065 % growth Tax 5,854 11,278 13,427 14,572 17,658 Effective tax rate (%) Reported net profit 21,370 26,610 32,736 37,472 45,407 PAT margin (%) EPS (Rs) % growth DPS (Rs) Payout (%) Exhibit 43: Balance Sheet Y/E March (Rsmn) FY10 FY11 FY12 FY13E FY14E Equity 42,088 46,297 46,297 46,297 46,297 Reserves 117, , , , ,574 Net worth 159, , , , ,871 Long-term Loans 313, , , , ,135 Short-term Loans 30,710 45,577 55,846 67,612 79,489 Total Loans 344, , , , ,624 Deferred revenue 24,125 23,474 22,831 22,831 22,831 Deferred inc. from forex fluctuation - - 4,932 4,932 4,932 Deferred tax liability net 7,035 11,467 16,009 19,652 24,066 Liabilities 534, , , ,360 1,063,324 Gross block 432, , , , ,159 Depreciation 111, , , , ,745 Net block 320, , , , ,414 Capital work-in-progress 181, , , , ,303 Deferred forex fluctuation asset 13,167 13,167 13,167 Investments 14,532 13,651 12,845 9,939 8,506 Inventories 3,449 3,815 4,403 5,349 6,515 Debtors 22,149 31,621 23,154 26,719 32,547 Cash 32,776 36,801 23,367 15,305 17,256 Loans and advances 4,875 4,995 6,281 7,348 8,950 Other current assets 55,488 57,050 80,485 93, ,881 Total current assets 118, , , , ,150 Creditors 76,346 71, , , ,531 Other current liabilities & provisions 24,583 28,755 34,859 43,252 52,686 Total current liabilities 100,929 99, , , ,216 Net current assets 17,809 34,389 1,870 (18,590) (26,066) Miscellaneous exp. not written off Total Assets 534, , , ,360 1,063,324 Exhibit 42: Cash flow Y/E March (Rsmn) FY10 FY11 FY12E FY13E FY14E EBIT 37,936 48,878 57,912 71,032 85,907 (Inc.)/dec. in working capital 7,856 (11,741) 10,232 12,398 9,427 Cash flow from operations 45,792 37,137 68,143 83,430 95,334 Other income 3,598 5,490 7,497 5,143 5,910 Depreciation 19,787 21,993 25,725 31,614 39,127 Interest paid (-) (15,432) (17,339) (19,433) (24,130) (28,752) Tax paid (-) (2,300) (4,914) (8,885) (10,929) (13,244) Dividend paid (-) (5,909) (7,607) (11,344) (13,059) (15,824) Net cash from operations 45,536 34,759 61,704 72,068 82,552 Capital expenditure (-) (100,527) (135,675) (174,808) (190,000) (190,000) Net cash after capex (54,991) (100,916) (113,104) (117,932) (107,448) Inc./(dec.) in long-term borrowing 60,575 49,793 88,595 95,198 96,091 Inc./(dec.) in short-term borrowing (1,062) 14,867 10,269 11,766 11,876 Inc./(dec.) in borrowings 59,514 64,660 98, , ,967 (Inc.)/dec. in investments 3,918 2, ,906 1,432 Equity issue/(buyback) - 37, Cash from financial activities 63, ,153 99, , ,339 Others Opening cash 24,289 32,776 36,801 23,367 15,305 Closing cash 32,776 36,801 23,367 15,305 17,256 Exhibit 44: Key ratios Y/E March FY10 FY11 FY12 FY13E FY14E Per share (Rs) EPS Book value Valuation (x) P/E P/BV EV/EBITDA EV/sales Return ratios (%) RoCE RoE Profitability ratios (%) EBITDA margin EBIT margin PBT margin PAT margin Turnover ratios Asset turnover ratio (x) Debtor days Inventory days Creditor days Solvency ratios (x) Debt-equity Interest coverage Power Grid Corporation of India