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Power Grid: Capacity addition aids growth

Oct 21, 2010

Power Grid has declared its 2QFY11 results. The company has reported a 25% YoY growth in sales while net profit has grown by 42% YoY. Here is our analysis of the results.

Performance summary
  • Net sales grow by 25% YoY during 2QFY11, 21% YoY during 1HFY11.
  • Operating margins rise to 84% during the quarter, from 83.8% in 2QFY10. This is largely on account of lower staff costs (as percentage of sales).
  • Led by higher operating margins and lower depreciation, net profit grows at a faster rate of 42% as compared to the growth in net sales.

(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Sales 17,013 21,266 25.0% 34,155 41,258 20.8%
Expenditure 2,763 3,409 23.4% 5,694 6,589 15.7%
Operating profit (EBDITA) 14,250 17,858 25.3% 28,461 34,669 21.8%
Operating profit margin (%) 83.8% 84.0%   83.3% 84.0%  
Other income 996 963 -3.3% 1,997 2,469 23.6%
Depreciation 5,819 5,456 -6.2% 10,489 10,455 -0.3%
Interest 3,935 4,017 2.1% 7,689 8,091 5.2%
Profit before tax 5,493 9,348 70.2% 12,281 18,592 51.4%
Extraordinary income/(expense) (8) (35)   6 (23)  
Tax 885 2,799 216.2% 2,222 5,023 126.1%
Profit after tax/(loss) 4,600 6,514 41.6% 10,066 13,546 34.6%
Net profit margin (%) 27.0% 30.6%   29.5% 32.8%  
No. of shares (m)       4,207.7 4,207.7  
Diluted earnings per share (Rs)*         5.7  
P/E ratio (x)*         18.7  
* On a trailing 12-months basis

What has driven performance in 2QFY11?
  • Power Grid (PGCIL) grew its net sales by 25% YoY during the quarter. This was largely helped by a 22% YoY growth in its transmission income (91% of total). A part of this increase in transmission income was due to commissioning of new projects during the quarter. In all, the company commissioned Rs 39 bn worth of net transmission lines during the quarter as against Rs 10 bn worth of commissioning in 2QFY10.

  • As for PGCIL’s other two businesses of consultancy and telecom, sales were up 57% YoY and 9% YoY during the quarter. These businesses together form just around 6% of the company’s total sales.

  • Led by a small decline in employee costs, PGCIL saw an improvement in its operating margins during 2QFY11. Staff costs declined from 10% of sales in 2QFY10 to 9.1% this quarter.

  • Helped by higher sales and better operating margins, as also lower depreciation, PGCIL’s net profits grew by 42% YoY during the quarter. The profit growth could have been higher but for the increase in MAT rate that led to the company’s tax expenses rising by around 216% YoY. Profit growth for 1HFY11 stood at 35% YoY, on the back of a 21% YoY growth in net sales.

What to expect?
At the current price of Rs 106, the stock is trading at a multiple of 18.7 times its trailing 12 months earnings and 13.7 times our estimated FY13 earnings. Based on our estimated FY13 book value per share, the stock is trading at a valuation of 2.1 times. The company has outlined its plans of raising around US$ 1.9 bn through a follow-on public offer (FPO) which will hit the markets in the second week of November. This FPO will involve a 10% fresh issue by the company apart from a 10% stake sale by the government. As per PGCIL’s management, the proceeds from this issue will be utilised for part-funding the construction of nine nationwide high capacity power transmission corridors, which would involve a total investment of around US$ 13 bn (as part of the eleventh five year plan capex). The company has already spent around 45% of this money during the first three years of the plan period. We maintain our view on the stock from a 2-3 years perspective.

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