Stock Review: POWER GRID

Power Grid posted strong earnings growth during the fourth quarter with healthy operating margins. The outlook for the company remains positive with its ongoing capex and strong domestic demand for power transmission services.
During the March 2011 quarter, the company reported a flat revenue at . 2,210 crore. The spurt in other income, coupled with a 710 basis points improvement in operating margins to 84.4%, boosted the net profit 37% to . 751 crore.

Given the huge need for transmission infrastructure in the country, and with almost no other player, the country's entire requirement can be catered to by only PGCIL.

The company's growth majorly depends on its ability to incur high capital expenditure and achieve timely completion of increasing its asset base. This will enable the company to capture the growth opportunity and allow it to improve return on capital employed. The company, which had aimed to invest . 54,500 crore during the 2007-12 period, plans to invest additional . 90,000 crore during the next 5-year plan, between 2013 and 2017. Healthy capex will help the company capture growth opportunity and quick capitalisation along with commissioning of transmission lines will allow it to improve the return on capital employed. For FY11, the company did a healthy capital expenditure of . 13,600 crore, but lagged slightly in the capitalisation guidance. It achieved a capitalisation of around . 7,362 crore, against a guidance amount of . 9,000 crore. But this reiterates the confidence, that the company is somewhere there and atleast the remaining increase in gross block will be scheduled for the current year.

One small concern is the increasing working capital cycle. Due to weak SEB financials, its receivable days have increased to 140 from 113. The FPO has allowed the company to reduce its debt-to-equity to 1.86 from 2.1, which is expected to remain the same through FY12.

It is currently trading at a price to book value of 2.1 and price to earning of 18.4, which are close to historic lows. Given a good show in FY11 and healthy capex in the coming years, Power Grid's earnings are set to witness a steady growth ahead.