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Power Grid: Strong operating performance - Views on News from Equitymaster
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Power Grid: Strong operating performance
May 30, 2014 | Updated on Jun 3, 2014

Power Grid Corp (PGCIL) declared its results for the quarter and year ended March 2014. During the year, the company's revenues and profits grew by 19% YoY and 6% YoY respectively. Here is our analysis of the results.

Performance summary
  • Net sales rise by 18% YoY during 4QFY14. Growth was led by the transmission (revenues up by 16% YoY) and consultancy (40% YoY) divisions of the company.
  • Operating profits increase at a faster pace of 20% YoY as margins expand to 85.4% (up from 83.9% in corresponding quarter last year).
  • Net profits rise by 6% YoY. The slowdown in profit growth was largely due to lower other income coupled with higher depreciation and interest charges. Profit before tax (excluding extraordinary and prepaid items) is up by 14.7% YoY during the quarter.
  • For full year FY14, revenues and profits up by 19% YoY and 6% YoY respectively.
  • Company's board recommends final dividend of Rs 1.31 per share. Total dividend paid out during the year stands at Rs 2.58, which at current price provides a yield of about 2.1%.

Standalone financial performance
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Net sales 33,807 39,863 17.9% 127,579 152,303 19.4%
Expenditure 5,427 5,831 7.4% 18,214 22,739 24.8%
Operating profit (EBDITA) 28,380 34,032 19.9% 109,364 129,563 18.5%
EBDITA margin (%) 83.9% 85.4%   85.7% 85.1%  
Other income 2,348 1,974 -16.0% 5,709 4,911 -14.0%
Depreciation 9,049 10,750 18.8% 33,519 39,957 19.2%
Interest 6,799 8,189 20.4% 26,091 31,675 21.4%
Exceptional items 52 -   739 -  
Prior period items 117 (201)   247 (205)  
Profit before tax 15,049 16,865 12.1% 56,449 62,638 11.0%
Tax 3,954 5,107 29.1% 14,104 17,663 25.2%
Effective tax rate 26% 30%   25% 28%  
Profit after tax/(loss) 11,094 11,758 6.0% 42,345 44,974 6.2%
Net profit margin (%) 32.8% 29.5%   33.2% 29.5%  
No. of shares (m)       4,629.7 5,231.6  
Diluted earnings per share (Rs)*         8.6  
Price to earnings ratio (x)         14.5  
(*On a trailing 12-month basis)

What has driven performance in FY14?
  • PGCIL's revenues rose by 18% YoY during the quarter gone by. Growth was led by the company's consulting division (40% YoY) as well as the transmission segment (16% YoY).

    Segmental snapshot...
    (Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
    Transmission 32,798 38,043 16.0% 124,490 145,277 16.7%
    % share 94.6% 94.1%   95.7% 94.0%  
    Consultancy 1,225 1,716 40.1% 3,180 6,327 99.0%
    % share 3.5% 4.2%   2.4% 4.1%  
    Telecom 640 680 6.2% 2,438 2,882 18.2%
    % share 1.8% 1.7%   1.9% 1.9%  
    Revenues not adjusted for inter-segment revenues

  • PGCIL's operating profits rose by 20% YoY as margins expanded by 1.5% YoY. Lower other income coupled with higher depreciation and interest costs led to a 14.7% YoY increase in profits before tax (excluding exception and prior period adjustments).

  • For full year FY14, PGCIL's revenues and profits increased by 19% YoY while profits grew by 6% YoY. Not including exceptional and prior period adjustment, company's profit before tax increased by 13% YoY.
What to expect?
At the current price of Rs 125, the stock is trading at a multiple of 14.5 times its trailing twelve month earnings.

Not much change when it comes to the company's capex plans as it continues to aim for annual capex of about Rs 220 bn for the next few years. What remains vital is the capitalisation rate - the rate at which the WIP converts to gross fixed assets - over the next few years. Capex in FY14 stood at Rs 223 bn, while capitalisation stood at Rs 159 bn. The company's expects things to pick up on this from in the current year given the higher capital WIP at the end of the year. We have nevertheless remained conservative with our future estimates.

In terms of the company's debt to equity ratio, the same stands at 70:30, having come down post the FPO that was announced in December 2013. The company remains quite strong on the financial front.

The stock of PGCIL has gained by 26% in the year till date, and is up by 22% in the past three weeks. Our original target price for the stock was Rs 156 when we recommended it in July 2013. With the dilution in equity and lower shareholder returns we had revised the target price lower to Rs 123 in February 2014. As compared to the FPO price of Rs 84.5 (post discount for retail investors) that came out in December 2013, the stock is up by about 48%. Given the current run up in all power stocks, we believe investors should take up this opportunity and book profits in the stock at current levels. Since the near term upside in the stock is not commensurate with the risks, we recommend investors to Sell the stock.

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