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Power Grid: Execution prowess shines this quarter - Views on News from Equitymaster

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Power Grid: Execution prowess shines this quarter

Aug 11, 2014

Power Grid Corp (PGCIL) declared its results for the quarter ended June 2014 recently. The company reported a revenue and profit growth of 11% YoY and 9% YoY respectively. Here is our analysis of the results.

Performance summary
  • Net sales rise by 11% YoY during the quarter.
  • Operating profits grow by 11% YoY.
  • Profits after tax up by 9% YoY on the back of a good operating performance and lower tax outgo (mainly due to deferred tax adjustments).

Standalone financial performance
(Rsm) 1QFY14 1QFY15 Change
Net sales 35,600 39,419 10.7%
Expenditure 5,008 5,371 7.2%
Operating profit (EBDITA) 30,591 34,047 11.3%
EBDITA margin (%) 85.9% 86.4%  
Other income  741 1,333 79.9%
Depreciation 9,644 11,550 19.8%
Interest 7,599 9,279 22.1%
Exceptional items  - -  
Prior period items  60 (319)  
Profit before tax 14,150 14,232 0.6%
Tax 3,747 2,866 -23.5%
Effective tax rate 26% 20%  
Profit after tax/(loss) 10,403 11,365 9.2%
Net profit margin (%) 29.2% 28.8%  
No. of shares (m) 4,629.7 5,231.6  
Diluted earnings per share (Rs)*   8.8  
Price to earnings ratio (x)   15.0  
(*On a trailing 12-month basis)

What has driven performance in 1QFY15?
  • PGCIL reported an 11% YoY growth in revenues. Growth was led by the company's transmission segment (contributing to 97% of revenues), while its consultancy and telecom segments revenues fell by 36% and 11% YoY respectively.

  • PGCIL's operating profits were up by 11% YoY with margins expanding by 0.5% to 8.4%. Other income increased by 80% YoY seemingly due to interest earned on funds generated from the FPO. However, with the capitalisation rate rising gradually, the company's depreciation and interest costs have increased sharply as well. Adjusting for extraordinary items, profit before tax is up by about 3% YoY.
What to expect?
At current price of Rs 132, the stock trades at 15 times its trailing twelve month earnings.

What was interesting this time around was that PGCIL's capitalisation rate improved significantly. While capex in the year till date stood at Rs 75.3 bn (till July 2014), capitalisation stood at Rs 85 bn in the same period. The company seems well on its way towards being closer to achieving its annual capex target of Rs 225 bn.

With critical developments such as the FPO (of which half of the proceeds have been already utilised) and the new CERC norms (no major impacts due to the new norms) behind it, we believe the focus will now come back on the company's fundamentals. We still believe PGCIL continues to remain amongst the safest plays in the power space. However, in our view the valuations of the company already capture the strong in the positives and as such we maintain our 'sell' view on the stock recommended in May 2014 from a two to three year perspective.. Going by history, actual execution has usually been well away from its annual targets. Given that the company's revenues pretty much move in tandem with commissioning of assets, we would like to wait for a quarter or two before making any major changes to our estimates.

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

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