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Power Grid: Good start to the year - Views on News from Equitymaster

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Power Grid: Good start to the year

Aug 2, 2013

Power Grid Corp (PGCIL) declared its results for the quarter ended June 2013. The company reported a revenue and profit growth of 23% YoY and 20% YoY respectively. Here is our analysis of the results.

Performance summary
  • Net sales rise by 23% YoY during 1QFY14.
  • Operating profits grow by 24% YoY during the quarter.
  • Lower other income combined with higher depreciation and interest expenses leads to a slower growth of 18% YoY (adjusted for extraordinary items and prior period items) in profits before tax.
  • Net profits rise by 20% YoY (14% YoY after making adjustment).

Standalone financial performance
(Rs m) 1QFY13 1QFY14 Change
Net sales 28,896 35,600 23.2%
Expenditure 4,236 5,008 18.2%
Operating profit (EBDITA) 24,660 30,591 24.1%
EBDITA margin (%) 85.3% 85.9%  
Other income 907 741 -18.3%
Depreciation 7,565 9,644 27.5%
Interest 6,101 7,599 24.5%
Exceptional items (360) - -100.0%
Prior period items (4) 60 -1825.7%
Profit before tax 11,537 14,150 22.7%
Tax 2,836 3,747 32.1%
Effective tax rate 25% 26%  
Profit after tax/(loss) 8,701 10,403 19.6%
Net profit margin (%) 30.1% 29.2%  
No. of shares (m) 4,629.7 4,629.7  
Diluted earnings per share (Rs)*   9.2  
Price to earnings ratio (x)   9.7  
(*On a trailing 12-month basis)

What has driven performance in 1QFY14?
  • PGCIL reported a 23% YoY growth in revenues during the quarter. The company's transmission business contributed to about 95% of the revenues (96% in 1QFY13) and reported a revenue growth of 22% YoY. As for the other two segments – consultancy and telecom – these reported revenue growth of 57% YoY and 33% YoY respectively.

    (Rs m) 1QFY13 1QFY14 Change
    Transmission  28,166 34,354 22.0%
    % share 96.0% 95.2%  
    Consultancy  612 961 56.9%
    % share 2.1% 2.7%  
    Telecom  571 758 32.7%
    % share 1.9% 2.1%  
    Not adjusted for inter-segment revenues

  • PGCIL's operating profits increased by 24% YoY on the back of a 0.6% YoY expansion in margins. However, the growth in net profits slowed down to 20% YoY on the back of lower other income, and higher interest, depreciation & tax charges.

  • PGCIL's board has approved a Follow on Public Offer (FPO) where in it would look at issuing 15% of existing paid up share capital comprising a fresh issue of 694,458,802 equity shares. As per the company, these funds would be used towards meeting its investment programme, albeit subject to necessary approval of Government of India. It may be noted that this is different from what was hinted earlier wherein the company's management had stated it was comfortable with taking on more debt and stretching its balance sheet to a maximum of 3x its net worth. It may be noted that this concern was highlighted in our recommendation.
What to expect?
At current price of Rs 89, the stock trades at 9.7 times its trailing twelve month earnings.

The stock of PGCIL has declined sharply over the past few days. Since our Stockselect recommendation dated July 26, 2013, the stock is down by over 17%. The decline has largely been due to the company's board agreeing to a follow on offer of equities (FPO). This would dilute equity i.e. increase the number of shares by 15% and therefore temporarily dampen the return ratios. PGCIL's board agreeing to this decision is on the back of the company upping its capex plan by 10% to Rs 1.1 trillion for the ongoing 12th five-year plan end FY17. The company has already stretched its balance sheet – D/E ratio at 73:27 at the end of the quarter ended June 2013 – which is very close to the management's maximum level of 75:25.

It may however be noted that the FPO timing and price are unknown as of now. Given the government's divestment targets, the likelihood of the FPO occurring in the current fiscal is high.

What is more is that the company's capex plans may move up on the back of addition of new projects. These include the green energy corridor, high speed transmission corridor, and other projects, all of which would entail investments of nearly Rs 650-700 bn over the next few years. These projects will be added only on allotment to the company – through nomination or bidding process.

Nevertheless, given the company's strong business model and near monopoly position in the transmission space, we continue to believe in the long term fundamentals and prospects of the company. As such we reiterate our positive view on the stock from a two to three year perspective. We will factor in the FPO details into our target price once the same are released.

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

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Mar 22, 2019 (Close)


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