PGCIL: Fewer power trips

With concerns easing and project execution gaining momentum, the company is expected to report a healthy growth in FY11-13 earnigs.

The concerns over slippages in capital expenditure and rising receivables as a result of delays in payment by State Electricity Boards (SEBs) now seem to be easing for Power Grid Corporation (PGCIL).

As recent developments suggest and with the project execution gaining momentum, analysts now believe that the correction in its share price is overdone and the stock could be considered as an opportunity to invest with a medium- to long-term perspective. Valuations, too, are supportive. Based on the discounted future cash flow method, analysts value the company’s shares at Rs 110-120 each, which is about 12-22 per cent higher, compared to current price of Rs 98 (PE of about 12 times its estimated FY13 earnings).
 

STEADY GROWTH
In Rs crore	FY11	FY12E	FY13E
Sales	8,389	10,050	11,750
Net profit	2,697	3,039	3,572
EPS (Rs)	6.1	6.6	7.7
RoE (%)	14.5	13.6	14.5
PE (x)	15.8	14.7	12.5
P/BV (x)	2.1	1.9	1.7
E: Estimates; Source: Analyst reports RoE: Return on equity, P/BV: Price to book value

“Ramp up in capital expenditure, corresponding increase in its regulated equity (in terms of capital employed in core business, which generates regulated returns), higher incentive and short-term open access income should translate into 17 per cent annual earnings growth over FY11-13. We maintain PGCIL as our top pick in the turbulent market conditions,” wrote Hitul Gutka of PINC Research in his recent note on the company. Given the relatively lower risks compared to peers in the power sector and reasonable growth visibility, it is not surprising that the stock has outperformed.

INCREASING TRACTION
The last few months have been disappointing given that the quantum of capex on projects getting commissioned and earning the regulated return (referred to as capitalisation) of about 16 per cent has been slow. And consequently, it also raised the question about the company’s ability to meet its target of Rs 9,000 crore worth of capitalisation in 2011-12.

Only about 25-28 per cent of this work has been capitalised in the last six months ending September 2011, indicating the piling up of the work. However, with about 65-67 per cent of the work relating to transmission projects expected to be commissioned over the next two quarters, analysts now believe that the capitalisation target is achievable.

“Slippage in capitalisation in March 2011 and June 2011 quarters would be made up in the second half of FY12. We believe the FY12 target capitalisation can be achieved; it may even surprise positively,” says Saion Mukherjee of Nomura Equity Research in a note on PGCIL. By the end of FY11, the company was sitting on about Rs 26,600 crore worth of work-in-progress (about 2-3 year old work), which is now expected to commissioned in current and next year.”

The improving trend is also visible in the order flow. Orders from the company for the power transmission equipment and contracting sector was up 78 per cent in the month of August compared to July and 120 per cent higher than the year ago period. And this speed up in project execution is good from the growth and return perspective.

Meanwhile, the company recently commissioned an Rs 750 crore project which will help evacuate power from Tata Power’s 4,000 Mw Mundra UMPP to the main grid. In the first phase, capacity worth 1,600 Mw would be capitalised in the current month. This event has led analysts to expect marginally better return on equity (RoE) and growth in earnings in the current and next year. Also, analysts were earlier factoring some penalties on account of the delay of this project, which does not arise now as it has been commissioned on time.

IMPROVING FINANCES
The company’s debtor (receivables from customers) days reached to about 141 days in FY11 as against the 115 days in the FY10. During FY11, the company’s receivables increased by over Rs 1,000 crore to about Rs 3,200 crore. This is attributed to the problems relating to billing at older rates, which compounded as certain States requested for higher grace period for the payments. “PGCIL’s FY11 annual report indicates that Delhi, Daman & Diu and some of the North Eastern states continue to default beyond 60 days. The management expects this to improve going forward as distribution tariffs are revised and billing happens based on the new tariff norms. PGCIL has recently received most of the tariff orders, thus indicating normalised debtor days in future,” says Gutka.

Additionally, PGCIL should benefit from the tripartite agreements, which require the each SEB to maintain a letter of credit in favour of the company. According to the provisions, through letter of credit the SEBs need to cover 105 per cent of the preceding twelve months average monthly billing, which will be required to be updated twice every year.