Q3 results show chinks in Power Grid’s growth model
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The Power Grid Corp. of India stock gained 39% in the last one year as the company maintained the capital expenditure (capex) momentum despite the slowdown in the broader economy. In line with expectations, the company delivered a healthy performance for the December quarter. Revenue and operating profit increased in the range of 23-25%. All its business verticals—transmission, telecom and consultancy services—registered good growth.
Capex in the core transmission business remained strong. Till January, it is estimated to have spent almost 80% of the current fiscal year’s target. Where it lagged is in project start-ups or capitalization. It commissioned projects worth Rs6,820 crore, only slightly higher than in the second quarter (Q2). However, the company in its post-results presentation said it commissioned more projects in January and indicated strong project starts in the current quarter.
While delays are common in infrastructure projects, what investors should look at is the overall capex and capitalization trends. Once commissioned, transmission projects generate fixed business. For growth, be it revenues or book value per share, capacity additions are crucial. It is here the December quarter results raise a bit of concern.
As the accompanying chart shows, capitalization in the first nine months of the current fiscal year is lower than in the previous two years. 2015 saw unusually high project start-ups.
But April-December 2016 project additions are lower than 2014 levels, indicating a slight slowdown. Further the total works in hand, a barometer of the project pipeline, is down 4.8% from Q2. The year-ago figure is not available for comparison.
If the December quarter trends in total works in hand and commercialization hold for long (say in the current and next quarter), then investors may have to pare their growth expectations.
That said, Power Grid stock still remains a safe bet for investors. The absolute work in hand figure of Rs1.39 trillion is still a huge amount in the current environment. The amount should help the company maintain the current yearly capex run rate for at least four years, assuring investors of growth. “These projects are expected to be capitalized over next ~4 years of period. Also, the company plans to bid for 17 upcoming TBCB (tariff-based competitive bidding) projects worth Rs140 billion. We have retained our estimate for asset capitalization worth Rs300 billion each for FY17E/FY18E respectively,” Emkay Global Financial Services Ltd said in a note. One billion is 100 crore.
While the share price reflects the optimism—the stocks trades at two times the current fiscal year’s estimated book value—continuation of positive momentum in investments and capacity additions will be crucial for the stock’s outperformance.