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Power Grid: The momentum continues - Views on News from Equitymaster
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Power Grid: The momentum continues
Feb 19, 2013

Power Grid Corp (PGCIL) declared its results for the third quarter and nine month period ended December 2012. During the quarter, the company's revenues and profits grew by 36% YoY and 40% YoY respectively. Here is our analysis of the results.

Performance summary
  • Net sales rise by 35% YoY during 9mFY13.
  • Operating margins improved to 86.3% in 9mFY13 from 83.3% in 9mFY12.
  • Net profits rise by almost 41%YoY on the back of a strong operation performance.
  • During 3QFY13 revenues and profits rise by 36% YoY and 40% YoY respectively.
  • The cumulative transmission network stood at 98,367 ckms at the end of quarter. The company is targeting to achieve 1 lakh ckms by March 2013.

Standalone financial performance
(Rs m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
Net sales 24,666 33,617 36.3% 69,335 93,357 34.6%
Expenditure 3,779 4,386 16.1% 11,549 12,787 10.7%
Operating profit (EBDITA) 20,888 29,231 39.9% 57,786 80,570 39.4%
EBDITA margin (%) 84.7% 87.0%   83.3% 86.3%  
Other income 1,096 1,286 17.3% 4,428 3,776 -14.7%
Depreciation 6,792 8,654 27.4% 18,549 24,470 31.9%
Interest 4,706 6,848 45.5% 13,489 19,293 43.0%
Exceptional items 110 -   (531) 688  
Prior period items (31) (6)   (23) 130  
Profit before tax 10,565 15,008 42.1% 29,622 41,400 39.8%
Tax 2,472 3,717 50.4% 7,389 10,149 37.4%
Effective tax rate 23% 25%   25% 25%  
Profit after tax/(loss) 8,092 11,291 39.5% 22,233 31,251 40.6%
Net profit margin (%) 32.8% 33.6%   32.1% 33.5%  
No. of shares (m)       4,629.7 4,629.7  
Diluted earnings per share (Rs)*         8.9  
Price to earnings ratio (x)         12.0  
*On a trailing 12 months basis

What has driven the performance in 9mFY13?
  • Power Grid Corp (PGCIL) reported a 35% YoY increase in revenues during the nine month period ended December 2012. The growth was led by the improved project commissioning rate over achieved in the year till date. As mentioned earlier, we believe that despite the large execution issues being faced in power sector investments, PGCIL stands to gain from these investments over the long run. It may be noted that the quarter's revenues include one-off item of Rs 1 bn on account of wage remission arrears pertaining to earlier years.

  • PGCIL's transmission business - which contributed to about 96% of the revenues - grew by 36% YoY during the 9mFY13 period. As for the other two segments - consultancy and telecom - the former's revenues declined by 2% YoY while the latter increased by 20% YoY. The company has over 116 assignments valued at Rs 123 bn under execution and project worth Rs 14 bn under consideration. The telecom segment added 5 clients during the quarter ended December 2012.

    Segmental snapshot
    (Rs m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
    Transmission 23,434 33,123 41.3% 67,314 91,692 36.2%
    % share 94.9% 96.3%   95.1% 96.1%  
    Consultancy 731 666 -8.9% 2,001 1,955 -2.3%
    % share 3.0% 1.9%   2.8% 2.0%  
    Telecom 522 615 17.9% 1,494 1,798 20.3%
    % share 2.1% 1.8%   2.1% 1.9%  

  • 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. We see PGCIL's 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.

  • After successfully meeting its capex target of Rs 550 bn for XI Plan (FY07-12), PGCIL has now planned Rs 1 trillion capital expenditure for XII plan (FY13-17). The company has a capex plan of Rs 200 bn for full year FY13.

What to expect?
At the current price of Rs 108, the stock is trading at a multiple of 1.6 times our estimated FY15 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.

We had earlier recommended a Hold on PGCIL. However, as the stock has corrected by about 10% since, we believe investors should take this opportunity to 'Buy' the stock at current levels (or lower).

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