Power Grid Corporation

Investors can consider buying the stock of Power Grid Corporation (PowerGrid), the central transmission utility that carries 45 per cent of power generated in the country. The key positives for the company arise from the favourable CERC tariff norms for the next five years, proven execution capabilities and high earnings visibility arising from the rollout of the National Grid.

Higher budgetary allocations for rural transmission and the company’s diversification into telecom connectivity, consultancy and leasing, also provide scope for higher returns. At the current market price of Rs 102, PowerGrid is trading at 25.4 times its 2008-09 earnings and 21 times its estimated FY10 earnings. Though the valuation is not cheap, it is justified by the company’s near monopoly status, high earnings visibility and strong prospects. Increased volatility in the market can be used to accumulate the stock in tranches.

PowerGrid managed a 16.7 per cent growth in net profits as net sales grew 44 per cent in 2008-09, helped by higher transmission revenues. Adoption of the revised AS-11 with respect to foreign debt also aided profitability. Though operating expenses spiked due to higher employee costs, operating margins improved to 33 per cent (31 per cent in 2007-08). But increased loss in telecom business, increase in the Minimum Alternative Tax and fall in consultancy income dragged profit growth.

Higher reliance on debt has stretched the debt-equity ratio (currently at 2:1), but plans to come up with a Rs 3,000-crore follow-on offer may bring the debt-equity back into balance. PowerGrid has low levels of operational risk as the variable costs are transferred to the customer leaving it with fixed returns.

PowerGrid expects to invest Rs 55,000 crore from 2007 to 2012 to build 60,000 circuit km of transmission capability. During 2008-09, the company added 7,350 circuit km and 9 EHV AC sub-stations. An 80 per cent increase in the inter-regional transmission capacity by 2012 is also on the cards. The connectivity required by the pithead and coastal ultra mega power projects may also be a source of business. PowerGrid’s transmission projects linked to power generation projects may suffer execution delays. Equity funding is constrained at the current debt-equity of 70:30 required to fund the project. If the company does not manage to go through with its equity offer, its incremental capex may have 80:20 mix, escalating interest costs.