Stock Review: POWER GRID

Profits may take a hit down the road

POWER GRID, a power transmission company, has managed to record a reasonable performance for June'10 quarter, after three quarters of nearly stagnant sales. The performance would provide the much needed boost to the company, which is expected to come up with its follow-on offer in the next few months. Though the performance in the June quarter has been good, the near term outlook for the company and the stock remains somewhat uncertain owing to the expected offer.

Lower inter-state power transmission has impacted Power Grid's growth in the previous quarters. In the June quarter, however, it witnessed a reasonable growth. Sales grew by 17%, against the average of less than 3% over last three quarters. Similarly, net profit growth is more than double the average at almost 30%, aided by cost control and lower fixed cost per unit of electricity.

The company has a very high proportion of fixed costs, with interest cost and depreciation accounting for more than half of total cost. While these two items recorded an increase, this was more than compensated by increase in sales, leading to better profitability. With high capital investment on the building of transmission grid, the cost is expected to remain high in the short to medium term for the company.

The company owns and operates power transmission network across the country and earns revenue in the form of user charges for its network. The business is highly capital intensive with over Rs 40,000 crore of capital employed generating revenue of about Rs 7,000 crore annually. Further, even though the business is regulated in nature, which caps its profits, the company plans to lay out the transmission network to meet the needs of power across regions. It is undertaking massive capex program totaling Rs 55,000 crore by 2012, about half of which has been completed. To meet the equity needs for this program, the company would be undertaking 10% equity dilution, which would increase its net wroth by nearly Rs 4,000 crore. The follow-on offer is also an important part of the government program of divestment, and would generate funds to the tune of Rs 4,000 crore for the government.

With the expected equity dilution and capex plans in the near term, the company may witness pressure on its profits in the next few months. The company may also witness the prospect of muted revenue growth in the medium term due to lower network utilisation in certain segments.