Power Grid: Transmitting high-voltage growth

Timely project execution raises confidence of achieving ambitious capex target in 12th Plan, which should reflect in robust earnings growth

There are very few companies in the utility space which have come close to achieving their capacity addition targets for the 11th Five Year Plan (FY08-12). Power Grid Corporation is among the few to have done so. It has incurred Rs 54,000 crore of capital expenditure in the 11th Plan as against the target of Rs 55,000 crore. More important, its achievement gives some confidence to the market about the company’s ambitious target of achieving capex of Rs 100,000 crore in the 12th Plan (FY13-17).

The impact of timely project execution is also visible in its results for the March quarter, which was ahead of Street estimates, as well as the stock’s outperformance in the past year. The company reported strong growth of 40 per cent each in revenues to Rs 3,102 crore and net profit to Rs 1,042 crore, compared to the year-ago quarter. Better-than-expected results, coupled with a higher guidance by the company have also led analysts to revise upwards their FY13 and FY14 estimates for Power Grid.

For the stock, at current levels of Rs 106.35, it is trading at 1.9 times its book value and 12.5 times its earnings, based on FY13 estimates. Valuations look reasonable in the light of strong earnings visibility and improvement in return on equity.
 

ROBUST PROFIT, RETURNS OUTLOOK
In Rs crore	FY12	FY13E	FY14E
Sales	10,035	13,455	16,475
Net profit	3,255	3,984	4,841
EPS (Rs)	7.2	8.6	10.5
Return on Equity  (%)	14.8	16.1	17.5
PE (x)	15.0	12.5	10.3
Price to Book Value (x)	2.1	1.9	1.7
E: Estimates                                                            Source: Motilal Oswal Securities

Apart from the existing transmission capacities, the company generates incremental revenue by way of operationalisation (or capitalisation) of new projects. In the March 2012 quarter, the company capitalised projects worth about Rs 7,800 crore, far more than the Rs 2,228 crore spent in the December 2011 quarter, which boosted revenue growth. As new projects go on stream they also generate regulated returns (usually in the range of 14-16 per cent), thereby adding to profits, as well as improvement in return on equity (or shareholders’ funds). This is also a reason that the return on equity jumped almost 100 basis points, to 14.8 per cent in FY12.

Notably, there are more gains awaiting on this front. Analysts are expecting Power Grid’s return on equity to improve to 16.1 per cent in FY13 and further to 17.5 per cent in FY14. This is based on their estimates about commissioning of new projects currently under construction. For instance, about 39 per cent of the company’s total capital employed is in under-construction projects, which will add to revenues and profitability as these projects get operationalised. Additionally, in FY13, the company has plans to incur capex of about Rs 20,000 crore, as against about Rs 17,000 crore in FY12. Both, increase in operational asset base and higher capex are expected to drive growth in the coming years.

In this regard, the increase in capex guidance to Rs 100,000 crore in the 12th Plan adds confidence. Not surprisingly, analysts have upgraded their earnings estimates for the company. Nalin Bhatt, who tracks the company at Motilal Oswal Securities, said in a recent report, “We upgrade our FY13 and FY14 estimated earnings by 10 per cent to factor in higher capitalisation.”

Analysts are also expecting an improvement in the company’s other businesses. “The company is strongly focusing on increasing revenue streams from EPC/consulting and telecom segments. Since these segments have limited incremental investments, it would improve the overall ROE (return on equity) and capitalise the company’s experience and scale,” says Prakash Gaurav Goel, who tracks the company at ICICI Securities, in a recent report.

In this backdrop, analysts expect the company to report an annual growth of 20-22 per cent, each in revenues and profits over the next two years. However, to achieve this and sustain growth in it long run, they also expect to raise fresh equity, which might happen in FY14 or FY15.