Power Grid: New projects well on track

Revenue and profit grew at reasonable pace but quarterly results missed Street estimates

Power Grid has consistently delivered 18-20 per cent quarterly year-on-year revenue growth for 12 quarters and, more often than not, outperformed the Street’s expectations. This trend was partially broken in the FY16 fourth quarter (Q4) results. While net revenue at Rs 5,760 crore grew 22 per cent, keeping up with the tradition, it missed the Bloomberg estimate by a thin margin (Rs 5,783 crore). The underperformance of net profit was pronounced at Rs 1,599 crore (up 13 per cent y-o-y) compared to Bloomberg estimates of Rs 1,738 crore.

Despite the blip, investors have little to worry. First, operating profit at Rs 5,094 crore grew 26 per cent, y-o-y helped by lower employee cost and adjustment made for prior period income. Consequently, operating margins were maintained at 88.4 per cent (up 214 basis points y-o-y). Higher income from the telecom business (Rs 105 crore, up 33 per cent y-o-y) and sustained flows from high-margin consultancy vertical (Rs 163 crore) also helped operating margins expand in Q4.

Second, the pace of capitalisation in FY16 increased 46 per cent y-o-y at Rs 31,700 crore. Capitalisation indicates the amount of capital expenditure that became operational assets. As assets became operational, it led to higher interest expenses and impacted net profit. Finance cost at Rs 1,477 crore was up 42 per cent y-o-y in Q4 even as long-term borrowings in FY16 rose only 12 per cent y-o-y to Rs 1,00,240 crore. The Power Grid management explained that higher land acquisitions and forest clearances pushed up long-term debt in FY16. However, debt-equity ratio remains at 2.4 times. And, even as this ratio can go up to 3 times, it is not much of a worry as the company earns regulated returns on its investments.

Despite some slowdown in the pace of expansion seen in Q4, Power Grid envisages Rs 22,500 crore of capital expenditure (on new projects) and targets Rs 31,000 crore of capitalisation in FY17; replicating FY16 performance. Analysts at Motilal Oswal Securities, while rating Power Grid as their best pick in the power sector, peg its return on equity at 16.7 per cent in FY20 as capitalisation might outpace capex.

After its results on Thursday, all nine analysts polled on Bloomberg retained their ‘buy’ recommendation on the stock with an average target price of Rs 178.3 (18 per cent upside potential).