Power Grid Corp. of India Ltd is largely seen as a defensive bet in the energy sector. It has an annuity return model and doesn’t have to face fuel problems or environmental issues like power producers. No wonder then that it has continued to outperform the broader markets this year.
Its June quarter numbers don’t look very impressive at first blush. Operating revenue grew 10% from a year ago, driven by an 11% rise in transmission income.
Consultancy income shrank by 23% while revenue from its telecom business grew a tepid 3%. As a result, net profit was flat from a year ago.
However, if one adjusts for one-time items in the previous June quarter such as an increased return on equity component because of a change in minimum alternate tax rates, and income from a division which it acquired only in October, net profit growth comes in at 20%, according to estimates by JP Morgan India Pvt. Ltd.
Nevertheless, Power Grid has to continue building transmission lines to generate growth in revenue. The company has targeted capital expenditure of Rs17,900 crore for this fiscal. However, in the June quarter, it spent only Rs1,800 crore.
The more worrying thing is the capitalization of assets—or addition to the gross block. Power Grid missed its capitalization target in the last fiscal because of a possible delay in new power generation projects coming on stream.
Although it has targeted capitalization of Rs10,000 crore in this fiscal, so far only Rs1,600 crore has been achieved in the first quarter. Sure, it has more new projects planned, but as brokerage India Infoline Ltd points out: “Such projects are susceptible to delays given the challenges in securing regulatory permission and right of ways.”
Many new assets are also likely to be commissioned only in the second half of the fiscal. This means that earnings over the next couple of quarters may not grow much and could translate into limited upside for the stock from here.
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