Power Grid Corporation Trading Buy Target 115

Power Grid Corporation Trading Buy Target 115

Ø The power sector stocks overall have underperformed in last 12 months and seen significant valuation de-rating due to issues related to fuel shortage and weak financial health of the State Electricity Boards (SEBs).

Ø Power Grid Corporation of India (PGCIL) is the Central Transmission Utility (CTU) of India and a 'Navratna' public sector company with ~69.4% govt. ownership. PGCIL has a monopoly in long distance high voltage power transmission in India. It has an inter-regional network which carries ~50% of India's power supply. PGCIL was recently awarded contracts worth ~Rs91bn vs. Rs21bn over Apr-Aug-11. Similar uptick has been witnessed in investment approvals. We feel worst is over for the stock as well as the whole sector.

Ø Technically PWGR has just closed below is 200DMAfacing resistance in the stock on the falling trend line ,after consolidating between INR 95-100(see the chart Attached) in medium term. According to us, RSI oscillator on daily chart which is also showing some strength indicating upside momentum reliable.

Ø Looking at the futures activity the Open Interest in the stock is Rising since DEC expiry along with positive price action indicating some long accumulation in the stock. The open interest in the stock is 12.7 mln shares indicating not much leverage position in the stock.

Ø On fundamental side company has witnessed strong earnings visibility on back of Strong Growth in Other Business Verticals such as – Short‐Term Open Access, Telecom & Consulting Biz, and also Interest Rate Cycle Close to Peaking Out.

Ø PGCIL diversified into the telecom sector in 2004, which offers end‐to‐end leasing of bandwidth to telecom operators, through its overhead transmission infrastructure. It is currently managing about 25,000 km of telecom network. BSNL, Tata Tele, Bharti Airtel and Rel Com are among the customers of its telecom division, which generates annual revenue of Rs. 2.11 bn in FY11. PGCIL recently decided to capitalize its transmission towers by leasing space on the towers to telecom service providers. Note Over all The Telecom Industry have begun gaining traction in 3G,and voice traffic has rebounded in 3Q.

Ø Reports suggest that over Oct-Nov 2011, power demand in India grew 12% YoY (much higher 20% YoY in Nov-11). Average spot rate at IEX was INR4.9/unit over October to 3rd week of December 2011 (up 100% YoY and 61% QoQ). Spike in near-term prices for shorter duration contracts was also led by Telangana strike and lower coal availability.

Ø We Suggest going LONG on Power Grid With Stop at 94 with a Target of 115 (i.e 15% upside)