Power Grid: Rewarded for steadiness

Power Grid Corporation of India (PGCIL) is among the few state-run companies to consistently maintain its earnings run-rate, despite a grim sectoral outlook. This explains why the Street has also rewarded PGCIL's stock with 47 per cent gains in the last one year, way ahead of BSE Sensex returns. In the September 2016 quarter (Q2), too, the company has delivered better than anticipated results.

Revenues at Rs 6,255 crore, expanded by 29 per cent year-on-year and net profit at Rs 187 crore witnessed a 32 per cent year-on-year increase. The relatively smaller segments, namely consultancy and telecommunication (accounting for five per cent of total revenues), also grew at a robust pace. These posted revenues of Rs 154 crore and Rs 143 crore respectively, growing by 53 per cent and 33 per cent respectively over a year-ago numbers. Earnings for these segments started improving from the September quarter last year and this is now being steadily maintained. In fact, the operating margin expansion in Q2 from 88.4 per cent a year-ago to 89.6 per cent, may be credited to the improvement posted by the consultancy and telecommunication businesses. The core transmission segment posted 29 per cent growth in revenues to Rs 6,100 crore.

While these are positives, the only noticeable blip is the constant increase in interest cost. But as long as this correlates with the pace of capitalisation (capital expansion or capex brought on stream), which is usually working capital heavy, the 34 per cent increase in interest cost (Rs 1,588 crore in Q2) doesn't assume much concern for now.

Therefore with capex and capitalisation rate remaining strong, analyst conviction on the stock too is robust. PGCIL trades at 12x FY17 earnings. Any decline in price may be used as a good entry point to buy the stock.After some blip in June quarter, Q2 capitalisation and capex has once again turned robust. Total capex was seen flat at Rs 5,300 crore Q2. But capitalisation increased by 31 per cent year-on-year to Rs 6,700 crore, making up for the shortfall in capex growth. What is comforting is the management's assurance of meeting Rs 28,000 crore of capitalisation in FY17. The pickup in pace of capitalisation in Q2 gives analysts the confidence that PGCIL may well achieve the FY17 target despite only 30 per cent completion so far. In a few weeks, some major high-voltage direct current projects which are also high-value contracts are expected go on stream, thereby boosting the capitalisation in Q3. Capitalisation immediately reflects in the revenue and bottomline of the company.