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PGCIL: Stability in times of slowdown - Views on News from Equitymaster
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PGCIL: Stability in times of slowdown
Aug 31, 2009

In a recent trip to New Delhi, we met up with management of Power Grid Corporation of India Ltd. (PGCIL), India’s largest transmission utility, to understand its business, its current status quo, and its outlook for the future. Here are the excerpts of the research meeting. PGCIL, to put it briefly, is into the planning, executing, owning, operating and maintaining of high voltage inter-state electricity transmission systems in the country. It has been notified as the Central Transmission Utility (CTU) of the country.

It is the company’s responsibility to connect and operate India’s five major power regions of north-eastern, eastern, western, northern, and southern, so as to enable the transfer of electricity throughout the country from the point of generation to the points in various states where the power is needed.

The company currently carries about 45% of the total power generated in the country on its transmission network. PGCIL has a pan India presence with around 70,000 circuit km (ckm) of transmission network and 120 EHVAC (extra high voltage direct current) and HVDC sub-stations with a total transformation capacity of 79,500 MVA. Of late, PGCIL has also diversified into the telecom business to utilise the spare capacity on its country-wide transmission infrastructure and established a telecom network of over 20,000 km across the country, thus helping it also generate revenues from major telecom players in mobile and national long distance segment.

Business segments: PGCIL gets the major chuck of its revenues (about 88% in FY09) from the transmission business where it charges users a fee for transmitting electricity on its networks. Another 5% of its revenues come from its consultancy business, whereby the company utilises its skilled manpower to cater to not only the requirements of the in-house projects but also provide consultancy services to various power utilities and state electricity boards and clients outside the country as well.

In FY09, around 2% of PGCIL’s revenues also came from the telecom business, where it leases bandwidth on its network to more than 60 customers, including major telecom operators such as BSNL, Tata Teleservices Limited, Reliance Communications and Bharti Airtel. The company has not yet broken even in this segment, but hopes to do so by the end of the current financial year (FY10). The tariffs for the telecom business, unlike its power business, are market driven and are not regulated by the government.

Regulated prices and profitability: The tariffs that PGCIL can charge the states (to whom power is supplied) for transmission are regulated and fixed by the CERC (Central Electricity Regulatory Commission). These tariffs are calculated and set in such a way that the company can have only about 15.5% of return on equity on its operational networks. And if it is successful in completing a particular project on time, it gets to enjoy an extra 0.5% ROE for that project as an incentive from the government. It will be pertinent to note here that, like most other projects in the power sector, its projects too are funded by a mix of debt and equity in the ratio of 70:30.

Though it gets about 16% ROE on operational projects, the overall consolidated ROE for the company is much lower. This is because a big chunk of equity at any point of time is invested in work in progress towards expanding its infrastructure and network. Project completion takes, on an average, 24 to 36 months for completion. Till that time, this equity effectively earns no returns for the company. Thus the overall ROE of the company gets dragged down due to this factor.

Insulated and stable revenues: As mentioned above, PGCIL’s revenues come from transmitting electricity to the various beneficiaries (a term used to describe the states to whom power is supplied). But a factor that significantly works in favour of the company is that it gets an annual or monthly fixed charge from the beneficiaries (according to their power allocation) for providing these services. Thus, its revenues are not tied to the actual amount of power transmitted during the period, thus insulating it from a lower amount of power being transmitted within a period due to various glitches on the generation side.

Capital expenditure plans: PGCIL plans to spend about Rs 115 bn in FY10, Rs 140 bn in FY11 and another Rs 140 bn in FY12 as capital expenditure towards increasing the capacity of its network and infrastructure. It may be noted that the company’s expansion plans have to be more or less in line with the generation capacity expansion in the country.

Challenges: Land acquisition for setting up its transmission lines has been a hurdle for the company in the past. Environmental clearances and acquiring land from its owners are some factors that slowdown the company’s projects and consequently its capacity expansion, which remains a risk in the future too. Receiving approvals from the authorities has been a tedious process for the company too, though it is now seeing things improve on this front.

What to expect?
At the current price of Rs 107, the stock is trading at a multiple of around 3 times the company’s FY09 book value per share. We shall soon initiate our research coverage on the company.

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