Power Transmission

Power Grid
Institutional Research Management Meet Note

October 28, 2010 We met Power Grid recently in Delhi. Key takeaways from the meeting
include a) majority of ordering for 11th plan complete, b) continued focus
CMP 101 on increasing vendor base c) domestic manufacturing clause to be
Target NA implemented gradually and d) HCTC’s and UMPP transmission networks to
Stock Return NA be the focus areas in the 12th plan. PGCIL is one of the biggest customers
for the T&D equipment and transmission line players who are highly
Nifty 6,013 dependent on PGCIL orders and spending. Our top picks in the T&D space
Sensex 20,005 are Crompton Greaves (TP: INR360) and Jyoti Structures (TP: INR170).

Majority of ordering for the 11th plan complete; 12th plan to start soon
Key Stock Data
PGCIL intends to spend INR129bn in FY11 and anther INR160bn in FY12 as capex;
Sector Power Transmisson this would imply a total capex spend of ~INR550bn over the 11th plan which is its
Reuters Code PGRD.BO MOU target. More importantly, PGCIL has already placed orders for a majority
BLOOMBERG Code PWGR IN of the capex it plans to incur next year; implies low execution risk and slippages
No. of Shares (mn) 4,209 into the 12th plan. It intends to soon start ordering for the 12th plan as well.
Market Cap (Rs bn) 429 Continued focus on increasing the vendor base; negative for incumbents
Market Cap ($ mn) 9,643 PGCIL has been continuously trying to increase its vendor base over the last few
6 mth avg traded value (Rs. mn) 208 years. In the last year alone, a number of new players - domestic and foreign have
been awarded orders for T&D equipment and transmission lines. This has lead to
Stock Performance (%)
intense competition with a resultant squeeze on pricing and margins for the
52 - Week high / low Rs 121 /95
incumbents (PGCIL awards orders on L1 basis where the lowest bidder gets the
3M 6M 12M
order). PGCIL intends to continue with this policy with a resultant negative
Absolute (%) 0.7 (10.0) (6.6)
implication for the incumbents.
Relative (%) (10.0) (23.1) (29.0)
Domestic manufacturing clause to be implemented gradually
Shareholding Pattern (%) In order to promote and safeguard the domestic T&D equipment manufacturers,
Promoters 86.36 PGCIL proposed to make domestic manufacturing mandatory for T&D equipment
FIs & Local MFs 5.68 suppliers in the next 3 years. This move was directed to benefit the domestic T&D
FIIs 1.65 players from cheap imports from China & Korea (especially in the 765kv segment).
Public & Others 6.31 Our discussions with PGCIL suggest that this would be implemented gradually and
Source: Company is content with imports in the meantime.

Sensex and Stock Movement HCTC’s and UMPP transmission networks to be set up in the 12th plan
Sensex Power Grid PGCIL intends to set up the 9 HCTC’s in the 12th plan for which it has ear marked
INR580bn (11th plan target capex is INR550bn). The HCTC’s would be used to
130 evacuate power from new generation plants being set up by private players; the
generating companies would be charged a fixed amount on the capacities allocated
105 to them. Additionally, a separate charge would be earned for short term open
access on these corridors as determined by CERC. Another key area for spending
80 in the 12th plan would be on setting up the transmission networks for evacuating
the power from the 4 UMPP’s, expected to be operational by 2017.
Dec-09
Jan-10
Oct-09

Sep-10
Oct-10
Jun-10
Apr-10

Aug-10
Nov-09

Jul-10
Feb-10

May-10
Mar-10

Valuations and Risks

Our favored picks in the T&D space are Crompton Greaves and Jyoti
Structures. Despite the tough competition in the domestic T&D equipment space,
Crompton has done a commendable job in maintaining market share and margins.
Ankur Sharma Going forward, we see an uptick in the overseas subsidiaries to provide the next
ankur.sharma@hdfcsec.com leg of growth in FY12. We like Jyoti Structures on account of its attractive
91-22-6171 7316 valuations and focus on the domestic transmission space.

HDFC Securities Research is also available on Bloomberg HSLB <GO>

 Power Grid – Management Meet Note
Institutional Research
Table 1: Valuation Table for T&D Equipment and transmission line
companies
Name of company Price EV/EBITDA P/E P/B
FY11E FY12E FY13E FY11E FY12E FY13E FY11E FY12E FY13E
Crompton Greaves 326 14.6 12.8 11.5 23.7 20.5 17.9 6.5 5.1 4.1
ABB India 901 31.9 22.0 17.2 50.6 35.6 27.5 7.0 6.0 5.0
Sector is not cheap trading at 12.3x
Areva T&D 296 20.3 15.5 13.9 42.5 31.0 27.5 7.0 6.0 5.4
2012 EV/EBITDA and 20.5x 2012
Siemens India 830 21.5 18.4 16.1 34.6 30.1 26.8 8.3 6.8 5.8
PE. KEC International 497 8.3 7.0 6.3 12.4 10.0 9.3 2.8 2.3 1.8
Kalpataru Trans. 174 6.5 5.4 4.1 10.5 8.6 8.3 1.6 1.4 1.2
Jyoti Structures 134 5.9 5.1 4.6 9.7 7.9 7.1 1.8 1.5 1.2
Sector Average 15.6 12.3 10.5 26.3 20.5 17.8 5.0 4.2 3.5
Sector Median 14.6 12.8 11.5 23.7 20.5 17.9 6.5 5.1 4.1

Source: HDFC Securities Institutional Research, Bloomberg.

Chart 1: PGCIL capex over the 11th and 12th plans

600,000 (Rs mn) 160%

144.9%
140%
500,000
120.5%
120%
400,000 103.0%
100%
99.9% 98.7%
300,000 82.5% 85.1% 80%
66.2% 73.5% 81.4%
We expect PGCIL to be able to meet 200,000
60%
its target of INR550bn for the 11th 47.3% 40%
100,000
plan 20%
0 0%
FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10
Xth Plan

XIth Plan
FY11-12E
MOU Target Actual acheivement

Source: HDFC Securities Institutional Research, PGCIL

Chart 2: India’s move towards higher voltage transmission lines

India has been moving towards

higher voltage transmission lines
since the 1950’s

Source: HDFC Securities Institutional Research, PGCIL

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