Stock Fundamentals

Power Grid: All charged to grow

Maulik Madhu | Updated on January 22, 2018

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The company’s dominance in the power transmission business gives it the edge

The stock of Power Grid Corporation of India (Power Grid), the country’s principal power transmission company, has fallen 7 per cent since our buy call in May 2015.

The stock seems to have been dragged down by the recent weakness in the broader markets. Investors can use the dip as an opportunity to increase exposure to the stock; the company’s growth prospects remain promising.

At ₹132, the stock seems reasonably valued. It trades at 1.8 times its 2014-15 consolidated book value, cheaper than its five-year average valuation of 2.2 times. On a price- to earnings basis, it trades at 13 times its trailing 12-month earnings, less than its historical valuation of 16 times.

Revenue visibility

Power Grid, which enjoys near monopoly on the country’s inter-state and inter-regional power transmission network, earns an assured return on its completed projects. This ensures revenue certainty for the company, making it a safe bet in the power sector. Transmission charges set by the Central Electricity Regulatory Commission (CERC) enable the company to recover from customers the costs plus a return on equity of 15.5 per cent on its commissioned projects. The costs comprise depreciation charge, finance cost and operation and maintenance expenses.

Power Grid also makes an additional 0.5 per cent return on equity for transmission lines (of at least 50 km length) commissioned on or after April 2014, if completed by the CERC stipulated timeline.

The company’s revenue growth therefore, depends on the expansion of its transmission network capacity. It has done well on this front.

Power Grid had a transmission line network of 1.2 lakh circuit km in 2014-15, 8 per cent higher than in the year before. Adding 4,200 MW during the year, it upped its inter-regional transmission capacity to 46,450 MW by March-end 2015.

It completed projects worth ₹21,760 crore in 2014-15, a third more than the year before. With projects worth ₹4,547 crore completed in the current fiscal (until early August), the company appears to be on track so far this year too.

Good financial performance

The expansion in the transmission asset base is reflected in Power Grid’s growing revenue, which rose 12.7 per cent in 2014-15 to ₹1,7659 crore.

Operating profit at ₹15,126 crore last fiscal was up 14 per cent. But impacted by higher fixed costs, net profit grew 11 per cent to ₹5,046 crore.

With year-on-year revenue growth of 20 per cent, Power Grid put up a good show in the June 2015 quarter. Profit too clocked double-digit growth — operating profit was up 21.5 per cent and net profit 20 per cent during the quarter.

During the current fiscal, Power Grid plans to incur capital expenditure of ₹22,456 crore; 36 per cent of this had been spent until July. As these projects get commissioned, the company’s revenue should get a boost.

The power transmission sector was opened to private sector participation in 2011 with the introduction of tariff-based competitive bidding (TBCB). But, this has not dented Power Grid’s position as the incumbent dominant player.

This is because projects awarded under the TBCB mechanism are still small in comparison with those falling under the regulated return model.

Moreover, many large transmission projects, for reasons of complexity and/or timely completion, continue to be assigned to Power Grid outside of the bidding mechanism, putting it in an advantageous position compared to private sector players.

With the expected expansion in the power generation capacity and the need for strengthening the existing network, investment worth ₹2 lakh crore has been planned for India’s transmission sector during the 13{+t}{+h} Plan.

Given that much of this capital expenditure will be incurred by Power Grid, the company is well placed to gain from growth in the country’s transmission network.

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Published on October 10, 2015
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