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Power Grid: Unaffected by sector woes - Views on News from Equitymaster

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Power Grid: Unaffected by sector woes
Nov 3, 2012

Power Grid Corp (PGCIL) declared its results for the second quarter and first half of financial year ended March 2013 (1HFY13). The company has reported 34% YoY growth in net sales while the profits grew by 41% YoY during the first half. Here is our analysis of the results.

Performance summary
  • Net sales grow by 34% YoY in 1HFY13 on the back of 35% YoY growth in transmission income.
  • Operating margins improved to 85.9% in 1HFY13 from 82.6% in first half of FY12.
  • Despite almost 25% fall in other income, net profits grew by 41% in 1QFY13.
  • The cumulative transmission network stood at 95,846 ckms at the end of August 2012 as against 93,000 ckms at end of March 2012. The company is targeting to achieve 1 lakh ckms by March 2013.

Standalone financial performance
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Net sales 22,644 30,858 36.3% 44,668 59,740 33.7%
Expenditure 3,945 4,164 5.6% 7,771 8,402 8.1%
Operating profit (EBDITA) 18,699 26,694 42.8% 36,897 51,338 39.1%
EBDITA margin (%) 82.6% 86.5%   82.6% 85.9%  
Other income 1,942 1,569 -19.2% 3,332 2,490 -25.3%
Depreciation 5,966 8,252 38.3% 11,756 15,816 34.5%
Interest 5,276 5,296 0.4% 9,425 11,757 24.7%
Profit before tax 9,399 14,715 56.6% 19,048 26,255 37.8%
Exceptional items (21) (140)   (9) (137)  
Tax 2,331 3,597 54.3% 4,917 6,432 30.8%
Effective tax rate 25% 24%   26% 24%  
Profit after tax/(loss) 7,089 11,258 58.8% 14,140 19,960 41.2%
Net profit margin (%) 31.3% 36.5%   31.7% 33.4%  
No. of shares (m)       4,629.7  
Diluted earnings per share (Rs)*         8.3  
Price to earnings ratio (x)         14.2  
(*On a trailing 12-month basis)

What has driven performance in 1HFY13?
  • Improved project commissioning rate over that achieved in 2QFY12 helped Power Grid Corp (PGCIL) have a commendable show for 1HFY13. 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 34% YoY growth in its net sales during 1HFY13. 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. Of the issue proceeds of the follow on offer of Rs 37 bn, the company has utilized Rs 32.2 bn by September 2012.

  • 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) 1HFY12 1HFY13 Change
    Transmission 42,457 57,336 35.0%
    % share 95.1% 96.0%  
    Consultancy 1,256 1,278 1.8%
    % share 2.8% 2.1%  
    Telecom 954 1,125 17.9%
    % 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 full year FY13.

What to expect?
At the current price of Rs 118, 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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