Stock Review: Power Grid Corporation

 

Power Grid has little to worry about. No rivals. No dip in demand or cost worries. All that it has to do is run the business efficiently, and the returns will follow. That makes it one of the safest bets for any investor

   With a strong earnings visibility and low operational risk, Power Grid Corporation of India provides one of the safest investment opportunities in the power industry.

It showed a strong performance in the last fiscal and we expect it to continue doing well in the coming quarters. Long-term investors can buy into this scrip at the current valuation.

BUSINESS

Government-owned Power Grid Corporation of India (Power Grid) is the largest power transmission company in India. It has a market share of more than 50%. It also provides consultancy services and has established a robust telecom network across the country.

FINANCIALS

In the last fiscal, the company had net sales of 8,612 crore and net profit of 2,672 crore. Given the huge demand for transmission capacity, its financial performance is directly linked to its capital expenditure and how fast it is able to capitalise it. The company has done capital expenditure of 32,300 crore since FY08. It plans to spend at least 17,500 crore more in the current fiscal to achieve its XIth five-year plan (FY08-FY12) target. Currently, it has around 27,000 crore of capital work in progress.

The company enjoys operating margins as high as 90% as there is not much cost incurred post capex. The only expenses are on employees and maintenance. In FY11, its operating margin was 91%.

Its debt to equity is 2.8, which is well in line with the industry standards. According to its business model, it receives a fixed return on equity of 15.5%. The additional revenue from its consulting and telecom business increases the ROE to 17-18%.

INVESTMENT RATIONALE

Unlike other power utilities, Power Grid has the least operational risk. Its cost is fairly stable as it has very little of variable costs such as fuel and receives an assured return on the invested equity. Its major cost includes maintenance and employees, which is largely fixed. This provides strong earning visibility

The company enjoys dominance with almost 100% market share in the inter-state transmission industry and around 50% in the intrastate transmission. The huge capital and experience required for this kind of business, creates a barrier for competition.

Given the high demand for transmission from upcoming power generation capacities, it will continue to grow its capex. In the XIIth five year plan (2013-2017), its capex is pegged at around 1,00,000 crore. Funding is not a problem for this company as it has lots of cash on its books. It mainly does its debt funding through self-raised bonds and foreign borrowings.

It has also established a telecom network of more than 21,000 km across the country, which gives it additional returns over the assured return on equity.

VALUATION

Power Grid is trading at a price to earning multiple of 18.3, which is below is historical average of 19.3. Its price to book value is 2.1, below the historical average of 2.4. It's the only player in this business and does not have any peers for comparison. The company's earnings can be expected to grow at a compounded annual growth rate of 12-13%. At this valuation level, Power Grid scrip looks attractive