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Power Grid: Execution sets it apart from peers

Jul 9, 2012

Power Grid Corp (PGCIL) declared its results for fourth quarter and financial year ended March 2012 (FY12). The company has reported 20% YoY growth in net sales while the profits grew by 21% YoY during the year. Here is our analysis of the results.

Performance summary
  • Net sales grow by 20% YoY in FY12 while the company transmitted 59 billion units of energy in FY12 as against 57 bn units in full year FY11.
  • Operating margins remain stable at 84% with marginal improvement in the fourth quarter.
  • Higher other income also kept the net profit margin stable in 4QFY12 and FY12.
  • The cumulative transmission network stood at 93,000 ckms at the end of March 2012 as against 82,400 ckms at end of March 2012.
  • Declared dividend of 13.1% for FY12 in addition to interim dividend of 8% (dividend yield 1.9%).

Standalone financial performance
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Net sales 22,108 31,019 40.3% 83,887 100,353 19.6%
Expenditure 4,035 4,980 23.4% 14,448 16,530 14.4%
Operating profit (EBDITA) 18,073 26,039 44.1% 69,439 83,823 20.7%
EBDITA margin (%) 81.7% 83.9%   82.8% 83.5%  
Other income 3,700 3,069 -17.1% 7,100 7,496 5.6%
Depreciation 5,830 7,177 23.1% 21,994 25,725 17.0%
Interest 4,690 5,412 15.4% 16,254 19,432 19.6%
Profit before tax 11,253 16,519 46.8% 38,291 46,162 20.6%
Exceptional items 26 164   44 186  
Tax 3,768 6,037 60.2% 11,278 13,426 19.0%
Effective tax rate 33% 37%   29% 29%  
Profit after tax/(loss) 7,459 10,318 38.3% 26,969 32,550 20.7%
Net profit margin (%) 33.7% 33.3%   32.1% 32.4%  
No. of shares (m)         4,630.0  
Diluted earnings per share (Rs)*         7.0  
Price to earnings ratio (x)         16.1  
(*On a trailing 12-month basis)

What has driven performance in FY12?
  • Standing apart from its PSU peers in the power sector, PGCIL's thrust on not just undertaking a large capex but also on commissioning a major part of it has been instrumental in its commendable performance during FY12. The entity had a capex of Rs 178 bn in FY12 as against a target of 177 bn (Rs 121 bn in FY11). 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 21% YoY growth in its net sales during FY12. While the company transmitted 59 bn units of energy in FY12 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. The company commissioned projects worth Rs 141 bn in FY12 as against Rs 73 bn in FY11.

  • 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) FY11 FY12 Change
    Transmission 79,021 95,441 20.8%
    % share 94.2% 95.1%  
    Consultancy 2,994 2,899 -3.2%
    % share 3.6% 2.9%  
    Telecom 1,872 2,011 7.4%
    % share 2.2% 2.0%  

  • 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 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.

  • In the telecom segment, PGCIL's order book increased to Rs 10.5 bn from Rs 6.5 bn in FY11.

What to expect?
At the current price of Rs 113, the stock is trading at a multiple of 1.9 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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