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Power Grid: Doesn't disappoint on execution - Views on News from Equitymaster
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Power Grid: Doesn't disappoint on execution
Jun 4, 2015

Power Grid Corp (PGCIL) declared its results for the quarter ended March 2015 recently. The company reported a revenue and profit growth of 18% and 20% YoY respectively. Here is our analysis of the results.

Performance summary
  • Revenues rise by 18% YoY led by the company's transmission business segment which grew by 20% YoY.
  • Operating profits grow at a faster pace of 18.5% as margins expand by 0.4% YoY.
  • During the quarter, profits before tax rise by 7% YoY.
  • In full year FY15, revenues and profits rise by 13% YoY and 11% YoY respectively.
  • Board declares final dividend of Rs 1.31 per share, Total dividend paid out in FY15 stands at Rs 2 per share, translating to a yield of 1.4%. Dividend per share for the full year however declines by 23% YoY (Rs 2.58 in previous year)

Standalone financial performance
(Rs m) 4QFY14 4QFY15 Change FY14 FY15 Change
Net sales 39,863 47,032 18.0% 152,303 171,772 12.8%
Expenditure 5,831 6,695 14.8% 22,739 23,788 4.6%
Operating profit (EBDITA) 34,032 40,337 18.5% 129,563 147,984 14.2%
EBDITA margin (%) 85.4% 85.8%   85.1% 86.2%  
Other income 1,974 2,063 4.6% 4,911 6,028 22.7%
Depreciation 10,750 14,181 31.9% 39,957 50,854 27.3%
Interest 8,189 10,376 26.7% 31,675 39,793 25.6%
Prior period items (201) 247   (205) (471)  
Profit before tax 16,865 18,091 7.3% 62,638 62,894 0.4%
Tax 5,107 3,966 -22.3% 17,663 13,102 -25.8%
Effective tax rate 30% 22%   28% 21%  
Profit after tax/(loss) 11,758 14,125 20.1% 44,974 49,792 10.7%
Net profit margin (%) 29.5% 30.0%   29.5% 29.0%  
No. of shares (m)       5,231.6 5,231.6  
Diluted earnings per share (Rs)*         9.6  
Price to earnings ratio (x)         14.9  
(*On a trailing 12-month basis)

What has driven performance in 4QFY15?
  • PGCIL reported a growth of 18% YoY during the quarter ended March 2015. Growth was led by the company's transmission business (95% of revenues) as well as the telecom business (2% of revenues), which grew by 30% YoY. On the other hand, the consultancy division saw its revenues decline by 10% YoY during the quarter, PGCIL's operating profits were up by almost 19% YoY during the quarter, with margins expanding by 0.4% YoY to 85.8%. Profit before tax was up by 7% YoY on the back of higher interest and depreciation charges. Net profits were however up by 20% YoY on the back of tax adjustments (deferred tax).

  • During FY15, the company's revenues and profits were up by 13% YoY and 11% YoY respectively. For the full year, growth was led by the company's transmission division which grew by 15% YoY, while the telecom business grew by 4% YoY. The company's consultancy segment however saw sharp decline in revenues with the same declined by about 38% YoY. The segment however contributed to only 2% of total revenues.
What to expect?
At current price of Rs 143, the stock trades at 14.9 times its trailing twelve month earnings and at about 1.63 times our estimated FY17 book value per share.

What has been driving growth for the company has been its strong execution in recent times. Capitalization in FY15 stood at Rs 218 bn, while capex stood at Rs 225 bn, which had a high capitalisation to capex ratio of 97% as compared to 69% and 86% in the previous two years. .

Going forward, the company is looking to spend Rs 225 bn in the next two years each, The company continues to maintain a D/E ratio of 70:30, with average cost of debt coming down to 8.15% at the end of the year. The same stood at 9.3% at the end of 1HFY15.

As PCGIL continues to chug along, not much has changed in terms of its long term picture and story. We maintain our stance that the company maybe amongst the safest plays in the power space; however, we also do believe that the positives seem to be captured in the valuations and thus believe that the stock is fairly valued at the moment. We recommend investors to not buy more of the stock at current valuations.

We would like to remind investors that no stock should comprise of more than 3-5% of their portfolio.

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