Visibility remains intact

Though Q4 numbers were disappointing, improving execution and commissioning of new projects will ensure strong profit growth in FY14

Power Grid's annual results were in line but the fourth quarter results disappointed, with standalone net profit rising a mere 7.4 per cent year-on-year to Rs 1,109 crore. This could be attributed to lower than expected growth in revenue, which grew at 6.1 per cent year-on-year to Rs 3,198 crore in the fourth quarter ending March.

Earlier, the Street was worried about implementation of new projects, as a result of which the capital work-in-progress was piling up. This was hurting the returns ratio. However, the latest quarterly numbers suggest execution has improved of late, leading to higher capitalisation of the work in hand and, thus, improvement in the return ratio. Analysts believe this would have a positive effect in the coming quarters.

In the fourth quarter, the company capitalised (commissioned) about Rs 7,500 crore as against Rs 9,300 crore in the first nine months of financial year 2013. This clearly indicates improvement in execution, leading to increase in operational capacities that will start generating returns.

Hence, even as the March quarter numbers were a tad below estimates, analysts remain bullish on the stock, given the strong pipeline of projects, increasing capex and improvement in implementation. Also, the current stock valuations are favourable, believe analysts. The share is trading at Rs 113, discounting its FY14 estimated earnings by 10 times. This seems reasonable, as the return on equity (RoE) had improved to 16.5 per cent in FY13 as against 13.9 per cent in FY12. Analysts expect 20-22 per cent growth in earnings over the next two years, which provides comfort.

Good visibility
The capex and capitalisation of the ongoing projects are important for gauging growth in the coming years. The company earns a regulated RoE on the commissioned projects. In the current financial year, 2013-14, it intends to spend about Rs 20,000 crore, in line with its overall capex plan of Rs 1 lakh crore to be invested in the five years ending 2017 (the 12th Plan). In FY13, it incurred total capex of Rs 20,037 crore as against Rs 17,814 crore in FY12.

Notably, the capitalisation in financial year 2013 was higher by 32 per cent year-on-year at Rs 17,200 crore. This helped the company achieve a strong 24 per cent growth in revenue at Rs 13,328 crore and a 31 per cent surge in net profit at Rs 4,235 crore. In FY14, analysts are expecting Rs 16,000-17,000 crore capitalisation, which could add another Rs 1,200-1,300 crore to profitability, translating into a 23 per cent growth in net profit. However, if the current issues surrounding the power generation sector improves, the visibility for Power Grid's transmission business should also increase. On this front, the government is looking to resolve issues relating to coal supplies and power rates and, more important, looking at reforms aimed at strengthening the balance sheets of state-owned distribution companies.

Beyond FY14, there are other triggers, too. Besides the 12th Plan capex target of Rs 1 lakh crore, the company is also looking for opportunities in the Green Energy Corridors, which have an investment opportunity of Rs 43,000 crore. It is also pursuing opportunities to participate through joint ventures.

As a step in this direction, it has formed JVs in Bihar and Odisha, having a combined capex of Rs 8,800 crore. It is also in talks with Jharkhand, UP, J&K, Haryana and Manipur. Analysts believe this will help in growth in the coming years. It could also mean some dilution in the equity because of upward revision in the capex in the coming years.