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Power Grid: A stable quarter - Views on News from Equitymaster

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Power Grid: A stable quarter

Feb 7, 2014 | Updated on Feb 8, 2014

Power Grid Corp (PGCIL) declared its results for the quarter ended December 2013. The company reported a revenue growth of 9% YoY, while profits declined by 8% YoY. Here is our analysis of the results.

Performance summary
  • Net sales rise by 9% YoY during 3QFY14.
  • Operating profit growth came in at 6% YoY.
  • Profit before tax declined by 4% YoY on the back of lower other income and higher depreciation and interests charges.
  • Net profits decline by 8% YoY (rise by about 8% YoY after making adjustments).
  • During 9mFY14, revenues and profits rise by 19% YoY and 6% respectively.

Standalone financial performance
(Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Net sales 33,689 36,846 9.4% 93,772 112,440 19.9%
Expenditure 4,386 5,792 32.0% 12,787 16,908 32.2%
Operating profit (EBDITA) 29,303 31,054 6.0% 80,985 95,532 18.0%
EBDITA margin (%) 87.0% 84.3%   86.4% 85.0%  
Other income 1,213 1,148 -5.4% 3,361 2,938 -12.6%
Depreciation 8,654 9,903 14.4% 24,470 29,207 19.4%
Interest 6,848 7,874 15.0% 19,293 23,486 21.7%
Exceptional items - -   688 -  
Prior period items (6) (10) 64.5% 130 (5)  
Profit before tax 15,008 14,415 -4.0% 41,400 45,772 10.6%
Tax 3,717 3,995 7.5% 10,149 12,556 23.7%
Effective tax rate 25% 28%   25% 27%  
Profit after tax/(loss) 11,291 10,420 -7.7% 31,251 33,216 6.3%
Net profit margin (%) 33.5% 28.3%   33.3% 29.5%  
No. of shares (m)       4,629.7 5,231.6  
Diluted earnings per share (Rs)*         8.7  
Price to earnings ratio (x)         11.1  
(*On a trailing 12-month basis)

What has driven performance in 3QFY14?
  • PGCIL's revenues grew by 9% YoY during 3QFY14 led by a 6.5% YoY growth in the company's transmission business, and a 122% YoY rise in revenues from the consultancy segment. The company's telecom business grew by 10% YoY. Segmental snapshot

    Segmental snapshot
    (Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
    Transmission 33,123 35,270 6.5% 91,692 107,234 17.0%
    % share 96.3% 94.2%   96.1% 94.0%  
    Consultancy 666 1,477 121.9% 1,955 4,611 135.8%
    % share 1.9% 3.9%   2.0% 4.0%  
    Telecom 615 677 10.0% 1,798 2,202 22.5%
    % share 1.8% 1.8%   1.9% 1.9%  
    Not adjusted for inter-segment revenues

  • PGCIL's operating profits grew by 6% YoY, while profits declined by about 8% YoY. On adjusting for income earned in the corresponding quarter last year (one time income of Rs 1.6 bn on admission of claim by CERC for increase in employee cost on pay revision of earlier period), profits are higher by about 8% YoY.
What to expect?
At current price of Rs 97, the stock trades at 1.24 times our FY16 estimated book value per share.

With the overhang of the FPO behind it, all focus of the company will now be on execution we believe. With capex of Rs 1.1 trillion lined up for the ongoing five year plan (Rs 220 bn per year), all will depend on the ratio between capex and capitalisation going forward.

During the 10mFY14 period, the company has invested Rs 165 bn while capitalisation stood at Rs 95 bn during the same period. Also, with the FPO funds coming into the company, the current debt equity has moved back to the relatively comfortable position of 70:30.

Given the company's strong business model and near monopoly position in the transmission space, we continue to believe in the long term fundamentals and prospects of the company. As such we reiterate our Hold view on the stock from a two to three year perspective. It may be noted that we have revised the target price lower to Rs 123 (from Rs 156) after taking into account the dilution effects of the FPO. As PGCIL raised additional capital from the markets, it had issued new shares in the process (dilution effect). This would temporarily impact the company's return ratios due to two reasons - delayed utilisation of such funds and a larger capital base. This would impact our estimates as the estimated future book value per share would come in lower than anticipated (on account of a larger capital base). Since we value power stocks using a price to book value method - as opposed to a price to earnings multiple due the capital intensive nature of the business - the return ratios play a crucial factor, especially considering that return ratios of the sector are highly regulated. Considering of all of these factors, we have lowered PGCIL's target price to Rs 123. As per our estimates, the stock offers a point to point return of nearly 27% from the current price.

We would like to remind investors that no stock should comprise of more than 3-5% of their portfolio. This practice is suggested as it would help mitigate portfolio risks.

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Mar 19, 2019 10:57 AM


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