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Power Grid: Efficiency filters into margins - Views on News from Equitymaster

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Power Grid: Efficiency filters into margins
Jun 30, 2011

Power Grid has declared its fourth quarter and financial year 2011 (FY11) results. The company has reported 18% YoY growth and 32% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales grow by 18% YoY during FY11, backed by 17% Yoy growth in transmission revenues.
  • Operating margins rise slightly to 84.1% during the year, from 82.3% in FY10. This is largely on account of lower operational costs (as percentage of sales).
  • Led by higher operating margins and lower depreciation costs, net profit grows by 32% YoY during the quarter. The growth would have been higher but for a sharp jump in tax expenses.
  • Board recommends final dividend of Rs 1.25 per share; after an interim dividend of Rs 0.5 per share (dividend yield of 1.6%).


Standalone financial performance
(Rs m) FY10 FY11 Change
Net sales 71,275 83,887 17.7%
Expenditure 12,581 13,374 6.3%
Operating profit (EBDITA) 58,694 70,513 20.1%
EBDITA margin (%) 82.3% 84.1%  
Other income 3,762 7,111 89.0%
Depreciation 20,759 22,037 6.2%
Interest 15,432 17,339 12.4%
Profit before tax 26,265 38,248 45.6%
Tax 5,853 11,278 92.7%
Effective tax rate 22% 29%  
Profit after tax/(loss) 20,412 26,970 32.1%
Net profit margin (%) 28.6% 32.2%  
No. of shares (m)   4,629.7  
Book value per share (Rs)*   51.7  
Price to book value ratio (x)   2.1  
(*On a trailing 12-month basis)

What has driven performance in FY11?
  • Power Grid (PGCIL) grew its net sales by 18% YoY during FY11, backed by 17% Yoy growth in transmission revenues (92% of total revenues). A part of this increase in transmission income was due to commissioning of new projects during the quarter. As for PGCIL's other business of consultancy and telecom, revenues increased by 11% YoY and 19% YoY during the fiscal.

    Segmental snapshot...
    (Rs m) FY10 FY11 Change
    Transmission
    Revenue 65,764 76,906 16.9%
    % share 92.3% 91.7%  
    Consultancy
    Revenue 2,692 2,994 11.2%
    % share 3.8% 3.6%  
    Telecom
    Revenue 1,577 1,872 18.7%
    % share 3.8% 2.2%  
    Short Term Open Access
    Revenue 1,242 2,115 70.3%
    % share 1.7% 2.5%  

  • PGCIL saw a small improvement in its operating margins during FY11. Its operation and maintenance costs declined from 7.6% of sales in FY10 to 6.6% this quarter, thus aiding the improvement in margins.

  • Helped by higher sales and better operating margins, as also lower depreciation costs, PGCIL's net profits grew by 32% YoY during the fiscal. The profit growth could have been higher but for the increase in effective tax rates.

What to expect?
At the current price of Rs 109, the stock is trading at a multiple of 2.2 times our estimated FY13 book value per share. Power Grid is looking to expand its revenue opportunity by leasing out some of its 150,000 transmission towers to telecom carriers. It recently leased towers in the states of Himachal Pradesh, Punjab and Jammu & Kashmir, and plans a second phase of leasing towers for telecom in the next six months. The company has planned capex of Rs 185 bn for FY12 (55% above FY11 capex). PGCIL's long term prospects are better than most players in the infrastructure sector due to its monopoly in the power transmission segment.

We reiterate our positive view on the stock and will revisit our estimates shortly.

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