Power Grid is charged up for high growth

Led by robust revenue growth on new transmission lines, profits grew fastest in 12 quarters

On a day of volatile trade witnessed by the broader indices, the stock of Power Grid Corporation of India (PGCIL) was an exception pocketing nearly four per cent gains on Wednesday. The run-up was in anticipation of good December 2015 quarter (third quarter or Q3) numbers. Although the results came after market hours, they lived up to expectations, hinting that the cheer on the counter might spill over to Thursday as well.

Revenues in Q3 of FY16 at Rs 5,407 crore increased 24 per cent year-on-year (y-o-y), ahead of the Street’s estimates of Rs 5,300 crore. Robust revenue growth translated into 28 per cent y-o-y expansion in operating profit (Rs 4,796 crore) with margins, too, swelling up from 86 per cent in Q3 of FY15 to nearly 89 per cent in the December 2015 quarter. Strong performance hedged PGCIL against a near 26 per cent y-o-y rise in interest cost (Rs 1,288 crore), thus enabling its net profit (Rs 1,613 crore) to jump by 31 per cent, the highest ever since the 39 per cent rise seen in the December 2012 quarter.

Deepak Agrawala of Elara Capital adds the sharp improvement in the consultancy and telecom businesses works in favour of PGCIL. While revenues from consultancy business grew four per cent y-o-y, that of telecom was up 46 per cent y-o-y in Q3 of FY16. The key, however, is the core transmission business (accounting for 95 per cent of total revenues) wherein revenues clocked 25 per cent growth y-o-y. Earnings before interest and tax margin of transmission business, too, registered healthy expansion of near 300 basis points y-o-y to 60 per cent in Q3 of FY16; telecom margin almost doubled to 48 per cent.

The better than expected performance is largely due to capitalisation (start of operations of transmission lines) estimated at Rs 12,000 crore in Q3 of FY16 (up 67 per cent y-o-y) and includes completion of more than 11,750 circuit kilometres of transmission lines in October and November 2015. However, the Street will have the finer details from the management on Thursday.

Analysts at Reliance Securities say the PGCIL stock trades at attractive valuation of 11.3 times FY17 price-earnings. The research house, which has a ‘buy’ recommendation with a target price of Rs 170 (23 per cent upside from current level) feels PGCIL is a safe bet within the power sector as it is least exposed to operational risks like fuel and weak financials of state electricity boards. Notably, the capex visibility is pretty high for PGCIL, wherein apart from Rs 25,000 crore in FY16, the company plans to incur Rs 1 lakh crore during FY17-20 (four years), indicating healthy growth going ahead.