Stock Review: POWER GRID

India's largest power transmission infrastructure company posted a satisfactory December 2010 quarter result, with both net sales and earnings growing 21% year-on-year to 2,052 crore and 591, respectively. The 25% growth in the company's core business of power transmission during the quarter was the key positive of the results. Its other businesses of consultancy and telecom, which account for 7%, degrew year-on-year.

The company's power business works on a fixed return-on-equity model. To improve the return on equity, five years ago, it decided to diversify from power transmission into consultancy and telecom. Though these businesses will help improve the return on equity by few basis points, the future growth of the company will be driven mainly by the transmission business since large capex will be done there due to capacity addition requirements of the current 11th Five-Year Plan and to fulfil the macro objective of power sector. In transmission, it already has more than 50% market share and almost 100% in inter-state transmission.

In the December quarter, assets worth 1,739 crore were commissioned against 666 crore in the corresponding quarter of previous year. During past three years, its total assets have grown by over 20,000 crore, or 66%, to 50,500 crore by end-FY10. In the current fiscal, the overall commissioning has accelerated and the momentum is expected to sustain in the coming years, considering the congestion in transmission capacity, which is proving a key bottleneck in the power industry.

PGCIL plans aggressively incremental capex plans in the coming years. According to UBS, a leading brokerage firm, the company will do a capex of 24,600 crore during FY12 and FY13 combined, around 24% higher against 19,800 crore of FY10 and FY11. This high capex will help increase net sales and thus the earnings. The company also raised 3,712.6 crore through public offer during the December quarter to support its high capital expenditure plans out of which 3,000 crore is already utilised.

The current valuation is 2.8 times price-to-book value. High capital expenditure, the near monopoly and rising demand for its services ensure a continuing growth in the years to come.