Power Grid Corporation: Strong grid

POUND WISE

Huge growth potential in power transmission along with gains in the telecom business make Power Grid Corporation an attractive bet.

The recent meltdown in the stock markets has seen many stocks plunge over 50 per cent from their highs seen in January 2008. The good thing is that for long-term investors, this fall provides an opportunity to buy high quality stocks at reasonable valuations.

Power Grid Corporation is one such opportunity. Post its listing in October 2007 at Rs 90 compared with the offer price of Rs 52 per share, Power Grid's share price touched a 52-week high of Rs 167 per share, before correcting by 44 per cent to Rs 93 now.

Considering that the company is a direct proxy of India's growing power needs and enjoys a near monopoly in the domestic inter-regional and inter-state power transmission segments, it is all set to gain from the huge investments planned in the sector.

At the company level, apart from doubling its transmission capacities over the next four to five years, the company plans to leverage its transmission tower network by leasing space to the telecom operators, thus providing additional revenues.

On the back of investments planned in power generation, there will be an equal amount of investment required in the power transmission space for laying transmission lines across the country and inter-regional lines to facilitate transfer of power from surplus regions to the ultimately consumers.

Power Grid, a government-owned company, being the largest player has a bigger role to play. The company intends to invest about Rs 55,000 crore over the next five years as part of the 11th five-year plan.

This will include increasing its inter-regional power transmission capacity to more than 37,000 MW by 2012 compared with 17,000 MW currently. During FY08, the company increased its capacity from 13,700 MW to 17,000 MW, which includes 4,800 circuit km of transmission lines and eight new sub-stations.

The benefits of these new capacities and projects in the pipeline will be visible over the next four to five years translating into a revenue growth of about 25 per cent per year. This coupled with the improvement in the margins on account of higher contribution from the telecom business will lead to faster growth in profits.

Extracting synergies
Leveraging on its nationwide transmission system, Power Grid is extracting gains from the opportunity in the telecom space. The company owns and operates a fibre-optic cable network of 20,000 km, which connects over 100 Indian cities.

The company leases bandwidth on this network to more than 60 customers, including major telecom operators such as BSNL, Tata Communications (earlier VSNL), Tata Teleservices, Reliance Communications and Bharti Airtel.

The revenue from this segment has grown about ten-fold from Rs 7.4 crore in FY04 to Rs 77.3 crore in FY07 and stands at Rs 93.4 crore in the nine month ended FY08. These are estimated at about Rs 130 crore for FY08 and expected to grow at 25-30 per cent annually over the next few years.

Besides, the company also plans to lease space on existing towers to mobile service providers. The company currently has about 200,000 transmission towers spread across the country. 
 

TELECOM GAINS
Rs crore	FY08E	FY09E	FY10E
Fiber optic	130	160	200
Mobile tower	-	145	396
Total telecom revenues	130	305	596
Telecom NPM (%)	20%	48%	50%
Telecom net profit	26	146.4	298

Even assuming that 15-20 per cent or 30,000-40,000 of these are available for leasing, the company is estimated to earn revenues in the range of Rs 600-700 crore annually by FY11, considering prevailing tower rentals of Rs 35,000-40,000 per month. For FY09, leasing revenues are estimated at Rs 146 crore (7% of the total net profit) and at Rs 298 crore for FY10 (11.5% of the total net profit).

These apart, the company is also leveraging its vast experience in transmission related services, by providing consultancy services to various government funded projects such as implementation of projects under APDRP & RGGVY.

Consultancy business, which is about 5.7 per cent of the total income, has grown from mere Rs 37 crore in FY04 to Rs 226.4 crore and is expected to grow fast on account of increasing allocation of funds for various projects.

Also, the company is exploring opportunities in the overseas markets and is currently engaged in several projects including Bhutan Power Corp, Ministry of Energy & Water (Afghanistan), Nepal etc.

Investment rationale
For Power Grid, factors like benefits of diversification in revenues, expansion of capacities and better industry outlook and gains from telecom business, provide good long-term visibility in the earnings. Besides, the company's business model, which ensures a 14 per cent return on equity (RoE) on investment, ensures consistent revenue flow.

On the operational front, Power Grid has maintained average system availability above 99 per cent, thus leading to higher income (and RoE) under the incentive based tariff structure.

At current market price of Rs 93, the stock is trading at 19 times its FY09 estimated earnings and 15.5 times it's FY10 estimated earnings.

On the basis of the price to book value, the stock is available at about 2.3 times its FY9 estimated book value of Rs 39 per share and 2 times its FY10 estimated book value of Rs 45 per share. 
 

POWERFUL GROWTH
Rs crore	FY08E	FY09E	FY10E
Total revenues	4450.06	6050.86	7700.00
Operating profit	3649.05	5022.21	6468.00
OPM (%)	82.00	83.00	84.00
Net profit	1468.52	1996.78	2579.50
NPM (%)	33.00	33.00	33.50
BV (Rs)	35.00	39.00	45.00
P/BV (x)	2.70	2.40	2.10
EPS (Rs)	3.80	5.00	6.00
PE (x)	24.50	18.60	15.50

While no strict comparison is available, valuations are relatively low as compared with other power generation utilities such as NTPC, which is trading at 2.7 times its estimated FY09 book value and 2.4 time FY10 book value.

Investors can invest with a long-term perspective and expectations of good returns.