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Power Grid: Going headlong into investments
Jul 31, 2012

Power Grid Corp (PGCIL) declared its results for the first quarter of financial year ended March 2013 (1QFY13). The company has reported 31% YoY growth in net sales while the profits grew by 23% YoY during the year. Here is our analysis of the results.

Performance summary
  • Net sales grow by 31% YoY in 1QFY13.
  • Operating margins improved to 85% from 82.6% in first quarter of FY12.
  • Despite almost 34% fall in other income, net profits grew by 23.4% in 1QFY13.
  • The cumulative transmission network stood at 95,072 ckms at the end of June 2012 as against 93,000 ckms at end of March 2012.

Standalone financial performance
(Rs m) 1QFY12 1QFY13 Change
Net sales 22,025 28,883 31.1%
Expenditure 3,826 4,236 10.7%
Operating profit (EBDITA) 18,199 24,647 35.4%
EBDITA margin (%) 82.6% 85.3%  
Other income 1,389 920 -33.8%
Depreciation 5,790 7,565 30.7%
Interest 4,147 6,461 55.8%
Profit before tax 9,651 11,541 19.6%
Exceptional items 13 4  
Tax 2,586 2,836 9.7%
Effective tax rate 27% 25%  
Profit after tax/(loss) 7,053 8,701 23.4%
Net profit margin (%) 32.0% 30.1%  
No. of shares (m)   4,629.7  
Diluted earnings per share (Rs)*   7.4  
Price to earnings ratio (x)   16.1  
(*On a trailing 12-month basis)

What has driven performance in 1QFY13?
  • Improved project commissioning rate over that achieved in 1QFY12 helped Power Grid Corp (PGCIL) have a commendable show for 1QFY13. The entity had a capex of Rs 30 bn in 1QFY13 as against a target of 200 bn for FY13. 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 31% YoY growth in its net sales during 1QFY13. 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.Also it was awarded contracts worth Rs 60 bn in 1QFY13 as against Rs 3.3 bn in 1QFY12.

  • Revenues from transmission business continue to comprise more than 95% 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 155 bn. Hence the consultancy business pipeline is expected to recover. The telecom segment added 9 clients during the quarter of which 6 were government agencies.

    Segmental snapshot...
    (Rs m) 1QFY12 1QFY13 Change
    Transmission 21,010 27,736 32.0%
    % share 95.4% 96.0%  
    Consultancy 561 604 7.7%
    % share 2.5% 2.1%  
    Telecom 454 543 19.6%
    % share 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 FY13.

What to expect?
At the current price of Rs 119, the stock is trading at a multiple of 2 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. 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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