Stock Review: Power Grid Corporation of India Ltd (PGCIL)

The stock of Power Grid Corporation of India Ltd (PGCIL), which has been languishing broader markets for quite some time now, seems to be set to deliver better returns. The company, which is the largest transmission utility in the country, plans to spend 32 per cent, or Rs 17,700 crore, of its planned capital expenditure (capex) for the 11th Five-Year Plan during 2011-12. Additionally, some of the projects planned in the 12th Plan would be awarded in 2011-12 in a bid to ensure continuity.

The company recently said new transmission capacity, worth 18,000 mva, would be added in 2011-12. This is very large when compared to the 8,000-9,000 mva planned to be achieved in 2010-11. Analysts believe it is partly due to bunching up of projects and the recent delays in awarding projects. Nevertheless, as the 11th Five-Year Plan is nearing completion in 2012, it is apparent that awarding of new projects should improve. This means good news for its shareholders, as higher capex in the current and next financial years should help Power Grid report good growth in revenue and profits. At Rs 99, its stock is trading at reasonable valuations and offers 8 per cent earnings yield (EPS divided by current prices) and 2.5 per cent dividend yield, based on 2011-12 estimated financials.

MORE MONEY AT WORK

PGCIL generates regulated returns of about 18 per cent on every rupee of equity invested by it in the projects. This is also a reason that incremental growth in revenue every year comes from commissioning of new capacities. Over the last two years, the company undertook heavy capital expenditure. Because of this, its capital work in progress (CWIP) went up 54 per cent, from Rs 13,286 crore in 2008-09 to Rs 20,422 crore in 2009-10.

PGCIL is currently executing about 68 transmission projects, with a length of 40,000 circuit km, involving capital expenditure of Rs 81,800 crore. Of this, Rs 23,600 crore has been incurred during the current Five-Year Plan (till first half of 2010-11). More important, a large part of these projects is nearing completion. In short, this work in progress will soon get converted to operational assets, which should add substantially to the company's financials.

Based on the ongoing projects, the company is expected to put into operations capacity worth Rs 10,500 crore in 2011-12, which is quite high, compared to Rs 8,000 crore worth of projects expected in 2010-11. "We believe, given the large capex in 2011-12, it is possible for the company to achieve the revenue growth in excess of 22-25 per cent just due to the regulated returns. And, if we add the gains on account of improvement in efficiency and scale, the profit growth should be higher," says Rabindra Nath Nayak, senior research analyst, SBICAP Securities.

LONG-TERM DRIVERS

Beyond next year, too, growth is expected to remain robust, given that the company will generate huge cash from operations. That can be utilised for adding new capacities. The new capacities will be easily absorbed, considering the huge demand (new projects coming up) from the power sector in the years to come. According to estimates, about 10,00015,000 Mw of power-generation capacity, including the mega power projects, will go on stream in 2011-12. This will require support of transmission and distribution infrastructure so that the power produced can be evacuated and distributed to the end consumers.

Power Grid, which owns and operates over 95 per cent of India's inter-state or regional transmission capacity and transmits about 50 per cent of the power generated in India, clearly has a critical role to play. India is expected to develop over 125,000 Mw of power generation capacity over the next six-seven years. To support this growth in generation capacity, Power Grid alone is expected to invest up to Rs 1,00,000-1,20,000 crore, which is more than double the company's investment target of Rs 55,000 crore for the 11th Plan.