Delays dampen Power Grid's good show

Analysts expect commissioning of new projects to pick up in the September quarter

In what can be termed as the best quarterly performance since 2012-13 (FY13), Power Grid Corporation of India registered a year-on-year (y-o-y) revenue growth of around 29 per cent at Rs 6,120 crore in the quarter ended June (Q1), ahead of Bloomberg consensus estimate of Rs 5,807 crore. Even excluding higher other operating income at Rs 51 crore (earned from execution of transmission projects), revenue still beats estimate.

As Power Grid works largely on a cost pass-through model, operating-profit margin was maintained at 88.5 per cent. Despite interest costs increasing 33 per cent to Rs 1,518 crore, net profit grew a third to Rs 1,802 crore, ahead of estimate of Rs 1,634 crore.

Despite the strong show, Power Grid’s stock came under pressure, and was down 1.7 per cent to Rs 174.5 on Wednesday. Part of this can be attributed to profit-booking, given the 20 per cent rally in its stock price in the past three months.

However, fundamental issues such as low capitalisation and the wide gap between capitalisation and capital expansion (capex) also weighed on the stock. Capitalisation, the amount of capex that becomes operational, in Q1 stood at Rs 2,462 crore. It is just nine per cent of the total capitalisation target of Rs 28,000 crore set for FY17. Capex, however, was well within the targeted level of Rs 5,585 crore, meeting 24 per cent of the FY17 target of Rs 22,500 crore.

From an operations standpoint, the gap between capex and capitalisation should preferably not be wide, as that indicates slowdown in execution. In Q1, the gap widened to around Rs 3,000 crore. Analysts at Motilal Oswal Securities attribute the slowdown in capitalisation to delays in certain HVDC (high-voltage direct current) projects, completion of which is expected in the September quarter.

Therefore, even as slower capitalisation is not much of a concern for now, monitoring this becomes crucial hereon. That apart, consultancy and telecom divisions showed healthy growth. These divisions saw revenues expand 26-35 per cent y-o-y in Q1 to cross the Rs 100-crore mark each. Order book of over Rs 20,000 crore spread between the two divisions provides ample revenue visibility.

The core transmission business also operates with an order book of Rs 1.44 lakh crore. It is because of strong earnings (profit) potential that 10 out of 11 analysts polled on Bloomberg after the Q1 results retained their ‘buy’ suggestion on Power Grid, with an average target price of Rs 193.