Q1 results: Power Grid offers value, despite tariff concerns, stock gains

Healthy earnings trajectory for next three years keeps the Street positive

Even as Power Grid posted in-line performance for the June quarter (Q1), its stock gained a little over three per cent in the past two trading sessions despite the markets falling. 

All-round growth in Q1, improving visibility in the core power transmission business and, stock price correction of 20 per cent in the past two months that now factors in concerns over new tariff norms are all keeping analysts positive.

Its largest segment of transmission (revenue and profitability up 14 per cent each) drive earnings and a 46 per cent surge in telecom segment profits also helped. 

Telecom, with 21 per cent year-on-year growth in revenue, is expected to sustain this momentum. Analysts peg growth for the telecom and consultancy segments at 15-20 per cent each.

Prospects of the transmission business also remain firm, they say. 

Asset capitalisation (equity value of new projects starting to earn regulated returns) for Q1 was Rs 37 billion, up four per cent over a year, while capital expenditure (capex) was Rs 64 billion. 

Analysts say Power Grid is on course to achieve asset capitalisation and capex of Rs 270 billion in FY19, against its forecast of Rs 300 billion. 

Outstanding approvals at Rs 804 billion lend visibility to asset capitalisation for another three years, says Kotak Institutional Equities. 

All eyes, thus, will be on ordering of activities and investments by end-FY19, which will provide growth visibility beyond FY22. Meanwhile, concerns on new tariff norms, to be spelt out by the Central Electricity Regulatory Commission (CERC) in a few months do exists. While initial draft norms suggest it might be slightly earnings-dilutive, the final draft is awaited. Analysts at IIFL do not expect CERC to lower effective returns for Power Grid from FY20 in their base case scenario; they say clarity on such regulations will re-rate the stock. 

Others believe the stock correction since May factors in the negatives. Moreover, investment in interstate transmission infrastructure and the company bagging tariff-based competitive bids (TBCB) are being ignored by investors. 

From the current cost-plus 15.5 per cent RoE (return on equity) regime, Power Grid winning incremental TBCB orders will lower regulatory risks, as returns for such projects will not be re-set every five years, say analysts.