Power Grid: stable earnings profile to ride out market volatility

Power Grid: stable earnings profile to ride out market volatility

The country’s largest transmission utility, Power Grid Corp. of India Ltd (PGCIL), is reportedly raising 10,000 crore through domestic bonds in fiscal 2012. This, along with internal accruals, will be used to fund its capacity increase in power transmission.

The logic for PGCIL’s expansion is simple. Nationwide power transmission is a crucial link for the large capacity additions planned in electricity generation. For the six months ended September, the firm transmitted around half the power generated in India.

Net sales during the period grew by 25% over the year-ago period to 2,126.6 crore and net profit soared 41% to 651.4 crore. Of course, the fact that PGCIL falls under the regulated return on equity umbrella of 15.5% makes it a low-risk equity investment.

However, its stock price has been sluggish. It trades at 97 apiece and has underperformed the broad market by nearly 28% in the past 12 months. But this is not worrisome as, typically, regulated return entities underperform markets during an uptrend. In fact, assured returns become prudent defensive investment bets as equity markets get overheated.

Besides, the outlook for PGCIL in the medium to long term looks promising for several reasons. The government is slated to increase outlay for power transmission in the 12th Plan (2013-18). In tandem, PGCIL’s capital expenditure is expected to double to 1 trillion during the same period. Its near-monopoly in the segment and timely project completion record are positives in tapping public funds, though it is well covered for the near term. It raised about 3,800 crore through a follow-on public offer.

More importantly, investments made over the last 24 months will generate returns leading to expansion in earnings in the forthcoming years. An IIFL report says, “As against the average annual capitalization rate (completion of projects) of 4,500 crore through FY08-10, the run rate is set to double to 9,000 crore through FY11-13."

Further, its diversification into consulting business and leasing of transmission towers to telecom operators would add to earnings, although in the longer term. PGCIL’s nationwide network of transmission lines, especially in semi-urban and rural areas, would be an added edge. This could reduce the impact of rising debtor days—a key concern as state electricity boards are key customers of PGCIL.

Other risks are linked to drop in expansion plans, entry of new firms under the competitive bidding process and unforeseen delays in project completion. But it scores over some sector peers such as NTPC Ltd in that it is a distribution play with no risks of generation costs and merchant power pricing, which is affected by the market demand and supply.

The firm’s ability to generate a steady 16-18% growth in earnings over the next two years, bolstered by the low-risk business model, is reason enough for the stock to garner investor interest during volatile times.

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