Macquarie recommends `Underperform’ rating on Power Grid Corporation

Power Grid Corp

Research: Macquarie

Rating: Underperform

CMP: Rs 102

Macquarie recommends `Underperform’ rating on Power Grid Corporation. The PGCIL board, on 2 July, approved the follow-on public offer of 20% of existing paid-up share capital. The earnings forecasts are relatively in line with the market, while EPS forecasts are nearly 5-10% lower, as Macquarie factored in the new shares from the fresh equity issue. PGCIL may need to raise further equity in FY13/14. From an asset allocation perspective, regulated utilities underperform during periods of rising bond yields.

Anticipated follow-on public offer ( FPO) and equity raising this FY in addition to rising bond yields over next six months drive underperformance. On a PE basis, the stock is trading at 19x FY11E PE and 17x FY12E PE, a 20-30% premium to the sector. The price target implies a one-year forward PE of around 15-16x as a reasonable buying range.