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Power Grid: Capex slowdown retards growth - Views on News from Equitymaster

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Power Grid: Capex slowdown retards growth
Nov 8, 2011

Power Grid Corp (PGCIL) declared its results for second quarter and first half of financial year 2011-12 (1HFY12) results. The company has reported 8% YoY growth in net sales while the profits grew by 4% YoY during the half year period. Here is our analysis of the results.

Performance summary
  • Net sales grow by 8% YoY in 1HFY12 while the company transmitted 30 billion units of energy in 1HFY12 as against 57 billion units in full year FY11.
  • Operating margins remain stable at 84% with marginal deterioration in the second quarter.
  • Higher other income and lower tax incidence propel the growth in the net profit margins in 2QFY12.
  • The cumulative transmission network stood at 87,111 ckms as on September 2011 as against 82,300 ckms at end of March 2012.

Standalone financial performance
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Net sales 21,266 22,644 6.5% 41,257 44,668 8.3%
Expenditure 3,408 3,665 7.5% 6,589 7,236 9.8%
Operating profit (EBDITA) 17,858 18,979 6.3% 34,668 37,432 8.0%
EBDITA margin (%) 84.0% 83.8%   84.0% 83.8%  
Other income 963 1,942 101.7% 2,469 3,332 35.0%
Depreciation 5,456 5,966 9.3% 10,455 11,757 12.5%
Interest 4,016 5,556 38.3% 8,091 9,960 23.1%
Profit before tax 9,349 9,399 0.5% 18,591 19,047 2.5%
Exceptional items 35 (21)   23 (9)  
Tax 2,799 2,331 -16.7% 5,023 4,917 -2.1%
Effective tax rate 30% 25%   27% 26%  
Profit after tax/(loss) 6,550 7,068 7.9% 13,568 14,130 4.1%
Net profit margin (%) 30.8% 31.2%   32.9% 31.6%  
No. of shares (m)         4,629.7  
Diluted earnings per share (Rs)*         6.0  
Price to earnings ratio (x)         17.3  
*On a trailing 12-month basis

What has driven performance in 1HFY12?
  • PGCIL owns and operates 95% of India's power transmission capacity. The company also single handedly transmits nearly 45% of the electricity generated. PGCIL saw 8% Yoy growth in its net sales during 1HFY12. while the company transmitted 30 billion units of energy in 1HFY12 as against 57 billion units in full year FY11.While the sales growth was muted due to slower execution of capex plans, the company will benefit from the expansion of its network over the next few years. This will involve large execution issues as is the case with most power sector investments. However, we believe the company 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.

  • Revenues from transmission business continue to comprise more than 90% of the company's turnover as the consultancy business saw a drop in contribution.

    Segmental snapshot...
    (Rs m) 1HFY11 1HFY12 Change
    Transmission 37,756 40,858 8.2%
    % share 91.5% 91.5% 0.0%
    Consultancy 1,520 1,256 -17.4%
    % share 3.7% 2.8% -23.7%
    Telecom 894 955 6.8%
    % share 2.2% 2.1% -1.3%
    ST open access 1,088 1,600 47.1%
    % share 2.6% 3.6% 35.8%

  • 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. Although the recently concluded follow on offering of equity in FY11 has strengthened the company's equity position, we see its 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.

  • Projects worth 33 bn were commissioned during 2QFY12 as against Rs 8 bn during 1QFY12.

  • The capex during 1HFY12 were to the tune of Rs 37 bn as against Rs 120 bn in entire FY11. However the transmission line added was 3,965 ckms as against 6,760 ckms in FY11. PGCIL had completed 78% of its total capex plan of Rs 550 for the 11th 5-year plan by the end of October 2011.

What to expect?
At the current price of Rs 104, the stock is trading at a multiple of 1.7 times our estimated FY14 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. Given that the stock offers reasonable upsides from 3 to 4 year perspective, we reiterate our positive view on the stock.

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