Being in the transmission business, Power Grid Corp. of India Ltd is largely able to avoid the issues plaguing the power sector in India. With returns assured, all the company has to do is commission projects and recover customer dues on time.
The good news is that capital expenditure is progressing at a healthy pace. The company spent Rs.4,000 crore in the September quarter, compared with Rs.3,000 crore in the preceding quarter. Although project commissioning dropped from Rs.4,100 crore in the first quarter to Rs.2,693 crore in July-September, the previous capacity additions are driving earnings.
Aided by a 38% growth in transmission income, revenue increased 36.3% from a year ago. This income was boosted by the new tariff orders from the Central Electricity Regulatory Commission, which led to greater revenue recognition. While income from the telecom business increased 16.3%, the consultancy segment continued to shrink. The robust growth in the core transmission business, nevertheless, led to a 44.8% jump in operating profit.
Operating margin widened 3.6 percentage points from a year ago, mainly driven by the transmission business. Higher borrowings led to a 38.1% rise in interest costs. However, thanks to an accounting change, the company booked Rs.104.8 crore profit on exchange rate variation on foreign currency loans. Excluding the gains, profit before tax would have risen 46.6% instead of 57.7%. Overall, the transmission business helped it report a 58% growth in net profit.
The company, though, continues to see slippages on working capital. Trade dues during the quarter increased 6.1% to Rs.2,718 crore. Compared with the end of the last fiscal, receivables shot up 17.4%. Also, cash and bank balances fell 44.8% from a year ago, though that can be partly attributed to the ongoing capital expenditure plans.
Going ahead, new capacities are expected to help the firm report a healthy growth in earnings for the rest of the year. While the stock price is mirroring the positive outlook, outperformance beyond the current fiscal will largely be determined by the overall improvement in the domestic power sector. That’s because most of the current capacity additions are being done to augment the existing network.
But in the 12th Five-Year Plan, 50% of Power Grid’s capacity additions are aligned to independent power projects, which are facing a host of problems. Unless these are sorted out, a change in project schedules can hamper the company’s earnings growth trajectory.