Power Grid Corp. of India Ltd’s (PGCIL) December quarter financial numbers were largely unsurprising. After all, it’s an entity whose minimum return on equity is protected by government regulation. PGCIL is insulated from power prices and has enjoyed a monopoly in long-distance, high-voltage power transmission in the country. Add to that the company’s successful track record of executing projects, and you have analyst forecasts of net profit growth at 12-20% year after year.
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The flip side is, of course, that with a largely predictable return on equity, gains on the stock are muted. It is largely seen as a defensive bet. In calendar year 2010, it underperformed the Sensex by 29%. However, after its follow-on public offer, even if the stock has shed 6.5% in absolute terms, it has beaten the broader market by around 10 percentage points.
The trigger for the stock will have to come from other sources of revenue such as its consulting business and income from leasing its towers to telecom operators. These are high-margin businesses and PGCIL doesn’t have to incur additional expenditure to service these segments. Now these segments constitute some 8% of the revenue and December quarter performance has been lacklustre.
Consultancy income dipped 17% while the telecom business grew a measly 3.8%. Overall revenue increase of 21.6% from a year ago was led by an increase in transmission income, its core business. Operating profit grew 22.36%. But for an increase in deferred taxes, and a Rs10 crore hit due to change in depreciation and amortization norms, it would have met Street expectations. Still, its reported net profit of Rs591 crore is one-fifth more than a year ago.
The company had hedged itself for the next five years even as it loses its monopoly in implementing transmission project. PGCIL has a targeted capital expenditure of Rs1.05 trillion over the 12th Plan (2012-17), about double the current plan period. It has tied up about 80% of projects to be implemented over this period to regulated returns.
For the stock to deliver blockbuster returns, PGCIL has to boost the consulting and telecom businesses. The firm has invited expressions of interest from telecom operators in some northern states for leasing towers. It will open bids in the first quarter of fiscal 2012, a long time away. But in these trying times, PGCIL’s reputation as a defensive stock should serve it well.
Graphics by Ahmed Raza Khan/Mint
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