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Power Grid: Better execution bears fruit

Feb 15, 2012

Power Grid Corp (PGCIL) declared its results for third quarter and nine months ended December 2011 (9mFY12). The company has reported 12% YoY growth in net sales while the profits grew by 14% YoY during the nine month period. Here is our analysis of the results.

Performance summary
  • Net sales grow by 12% YoY in 9mFY12 while the company transmitted 49 billion units of energy in 9mFY12 as against 57 bn units in full year FY11.
  • Operating margins remain stable at 84% with marginal improvement in the third quarter.
  • Higher other income and lower tax incidence propel the growth in the net profit margins in 3QFY12.
  • The cumulative transmission network stood at 90,100 ckms at the end of Januray 2011 as against 82,400 ckms at end of March 2012.

Standalone financial performance
(Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Net sales 20,521 24,666 20.2% 61,778 69,335 12.2%
Expenditure 3,246 3,640 12.1% 9,836 10,875 10.6%
Operating profit (EBDITA) 17,275 21,026 21.7% 51,942 58,460 12.5%
EBDITA margin (%) 84.2% 85.2%   84.1% 84.3%  
Other income 931 1,096 17.7% 3,400 4,428 30.2%
Depreciation 5,709 6,792 19.0% 16,164 18,549 14.8%
Interest 4,051 4,735 16.9% 12,142 14,694 21.0%
Profit before tax 8,446 10,595 25.4% 27,036 29,645 9.7%
Exceptional items - -   - -  
Tax 2,535 2,503 -1.3% 7,578 7,412 -2.2%
Effective tax rate 30% 24%   28% 25%  
Profit after tax/(loss) 5,911 8,092 36.9% 19,458 22,233 14.3%
Net profit margin (%) 28.8% 32.8%   31.5% 32.1%  
No. of shares (m)         4,629.7  
Diluted earnings per share (Rs)*         6.4  
Price to earnings ratio (x)         17.2  
(*On a trailing 12-month basis)

What has driven performance in 9mFY12?
  • During the first nine months of FY12, PGCIL's thrust has been on not just undertaking a large capex but also on commissioning of a major part. The entity had a capex of Rs 103 bn in 9mFY12 as against a target of 177 bn for full year FY12. The capex undertaken in FY11 was to the tune of Rs 120 bn. But more importantly the rate of commissioning has been one of the highest in the last five years leading to growth in revenue. PGCIL saw 12% Yoy growth in its net sales during 9mFY12. while the company transmitted 49 bn units of energy in 9mFY12 as against 57 bn units in full year FY11. Despite large execution issues in power sector investments, we believe PGCIL stands to gain from these investments over the long run.

  • Over the next 5-10 years, most of the power projects to be set up by the government and private sector are of large capacities. This would require building a strong transmission network for carrying electricity to consumers. PGCIL is set to benefit a lot from this scenario.

  • Revenues from transmission business continue to comprise more than 90% of the company's turnover as the consultancy business saw a drop in contribution. However the company has over 40 consultancy projects in hand valued at over Rs 260 bn. Hence the consultancy business pipeline is expected to recover.

    Segmental snapshot...
    (Rs m) 9mFY11 9mFY12 Change
    Transmission 56,829 63,399 11.6%
    % share 92.0% 91.4% -0.6%
    Consultancy 2,078 1,990 -4.2%
    % share 3.4% 2.9% -14.7%
    Telecom 1,314 1,490 13.4%
    % share 2.1% 2.1% 1.0%
    ST open access 1,557 2,454 57.6%
    % share 2.5% 3.5% 40.4%

  • PGCIL's average debt/equity ratio over the past five years has been around 1.7 times. The projected expansion in capacities will lead to this ratio rising even further. This is given that new projects are likely to be funded by a debt to equity ratio of 70:30, or 2.3:1. Although the recently concluded follow on offering of equity in FY11 has strengthened the company's equity position, we see its debt to equity ratio remaining higher (average of 1.8 times over next three years) than its peers in power generation segment like NTPC. Having said that interest costs continue to remain a major drag on the company's bottomline.

  • Despite liquidity problems in the power sector the company has had no problems in receiving its realization in recent months.

  • PGCIL added transmission line of 6,200 ckms in 9mFY12 as against 7,065 ckms in FY11. The value of contracts approved were however lower at 115 bn in 9mFY12 as against Rs 190 bn in FY11.

What to expect?
At the current price of Rs 109, the stock is trading at a multiple of 1.8 times our estimated FY14 book value per share. PGCIL's long term prospects are better than most players in the infrastructure sector due to its monopoly in the power transmission segment. The stock besides being a defensive play can be tremendously wealth accretive if the execution risks in the power sector are eased out. PGCIL is expecting the additional revenues from leasing its towers to telecom operators and power consulting to boost its revenue growth and return ratios. However, we believe that it is too premature to factor in the same into our estimates. We reiterate our 'Hold' view on the stock.

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