Even as many power sector stocks have lagged broader markets in the last year, India’s central transmission utility, Power Grid Corporation (PGCIL), has done well. Even now, it is analysts’ top pick in the utilities space. Though their business models are different and, hence, not truly comparable, unlike its generation peers, PGCIL does not have any fuel and receivable risk. The company is also on track to achieve its 11th five-year plan targeted capitalisation (commissioning of assets), which in turn should help meet the Street’s expectations. More-over, long-term business visibility remains high.
Says Hitul Gutka, analyst, PINC Research, in his post results note, “We continue to retain PGCIL as our top pick in the pack, as it remains insulated from fuel and payment risk. Besides, the company scores over its generation peers, as it is one of the few companies moving ahead to meet capex target, which will translate into earnings growth.”
Adds Arun Kumar Singh, analyst, HSBC Global Research, “We reiterate our ‘overweight’ rating on the stock, as it is likely to beat most estimates by more than five per cent over the next two years, 22-25 per cent CAGR growth in regulated equity base, with limited downside.”
At Rs 109.35, the stock trades at 14.3 times and 1.9 times its FY13 estimated earnings and book value, which is in the middle of a historical band of 12-20 times and 1-3 times, respectively. While better visibility and lower risks should help sustain outperformer status, any prolonged delays in the country’s generation projects may have some impact on PGCIL’s capitalisation rate. Based on average target price of Rs 124, there is an upside potential of 14 per cent in the medium term.
Back on track
After subdued performance in first half of FY12 (seasonally weak, delay in capitalisation), wherein PGCIL reported single-digit revenue and profit growth of 8.2 per cent and 4.6 per cent, respectively, the company reported robust financial performance for the December 2011 quarter last Wednesday. The performance was led by transmission line business (over 90 per cent of revenues), which grew 16 per cent, boosted by commissioning of new lines. In contrast, most other utility companies have reported subdued performance.
Even other businesses, namely consultancy and telecom, recorded strong growth in revenues and profit before interest and tax (PBIT). Though reported net profit growth was higher, it was partly due to benefits from jump in short-term open access income of Rs 85 crore (directly benefits net profit with no significant cost) and capitalisation of foreign exchange rate variation on restatement of long-term liabilities. Even then, adjusted profit growth was healthy at 28.7 per cent.
Strong revenue visibility
Unlike many power generation firms which are facing rough weather due to shortage of coal, lower plant load factors and poor financial health of clients, PGCIL is not exposed to such risks. In fact, its business visibility is also better.
The fact that it has delivered largely in the past provides confidence. The company has capitalised assets worth Rs 6,300 crore and expenditure on new projects stands at over Rs 10,000 crore in nine months ending December 2011, compared to its FY12 target of Rs 10,000 crore and Rs 15,000 crore, respectively. Likewise, it had targeted capital expenditure of Rs 55,000 crore in the 11th Plan (up 177 per cent versus the 10th Plan) and has spent Rs 46,100 crore till date. These suggest, while it may marginally miss the near-term targets, it is quite close to these, too. For the 12th Plan (2012-2017) though, the company has planned a capex of Rs 1,00,000 crore (capitalisation target of Rs 90,000 crore) and the board has already approved investments worth Rs 70,000 crore, of which Rs 56,000 crore is already awarded.
Says Gutka of PINC, “Increased capitalisation owing to conversion of its huge capital work in progress (Rs 27,530 crore as of September 2011) and near doubling of its capex during the 12th Plan provides strong earnings visibility.” Nalin Bhatt, analyst, Motilal Oswal Securities, has upgraded his FY13 earnings estimates by seven per cent.
PGCIL’s strong operational cash flows will largely take care of the equity requirement for upcoming projects. This, along with money raised through follow-on public offering (Rs 1,800 crore spent out of Rs 3,713 crore) in November 2010 means there is unlikely to be any dilution in the near term.
