Fresh investments with a three-year investment horizon can be considered in the stock of Power Grid Corporation (PGCIL).
PGCIL, which wheels 50 per cent of the power generated in India, is on track to meet most of its capital expansion targets for the 11th Plan.
This augurs well for the company's financials even as other utilities have witnessed significant slippages in meeting their current Plan targets.
At current price of Rs 114, the stock is trading at 14.5 times the company's estimated 2012-13 fiscal earnings and two times its estimated March 2013 book value.
Lack of fuel related risks, regulated tariffs with much of the costs passed on and on-time execution of most projects justify slightly expensive valuations.
On-time execution of projects also earns higher incentives (0.5 per cent additional return on equity) for PGCIL. The company has superior operating efficiency with system availability of 99.93 per cent (for the nine months ended December 2011) as against mandated 98 per cent which enables it to earn incentives.
The company's return on equity at 12.6 per cent is low due to high proportion of capital work in progress, and unutilised cash on its books.
As it utilises this cash and generates higher revenues from other stream of income such as telecom and consultancy, returns may improve.
Over the next five years, the company is expected to invest as much as Rs 1 lakh crore in rolling out transmission corridors and strengthening its grids. PGCIL has already awarded contracts worth Rs 55,000 crore towards this, lending visibility to upcoming projects.
The company plans to set up 9 high capacity power transmission corridors to enhance inter-regional transmission of power.
Much of the thermal power capacity is concentrated in the States of Jharkhand, Chhattisgarh and Odisha while the power requirement is high in other parts of the country.
For the nine months ended December 2011, the net profit grew by 14.2 per cent year-on-year. Short-term income from agreements to wheel power to private clients, is on the rise.
This income would help it utilise its existing resources and also improve the overall return on equity.
The concerns about State Electricity Boards (SEBs) delaying payments appear to be overdone as the management claims that outstanding sums have been mostly recovered. Additionally, public sector companies such as NTPC and PGCIL have access to escrow accounts of SEBs unlike private sector peers.
PGCIL may not be significantly hit by delayed commissioning of power generation projects as investments in grid strengthening and wheeling of power for existing companies will help generate revenues.