The stock of Power Grid Corporation of India (Power Grid) has gained around 40 per cent since our ‘buy’ recommendation a year ago at ₹98. Despite the gain, investors can consider buying the stock, as it is still reasonably valued. The company, a safe bet in the power sector, has good growth prospects.
At ₹136, the Power Grid stock discounts its estimated 2015-16 earnings by around 11 times and its estimated book value by 1.6 times, at the lower end of its five-year valuation bands.
Power Grid, India’s principal power transmission company, has the lion’s share of the country’s inter-state and inter-regional transmission network.
Power Grid has been delivering well on the capacity addition front — as of March 2014, it had inter-regional transmission capacity of 37,950 MW, over a fifth more than a year ago. It has expanded its transmission line network to 1.1 lakh circuit km, 7 per cent higher than in March 2013. In the coming years too, the company is expected to continue expanding capacity which should add to its revenue.
Power Grid, which incurred capital expenditure of over ₹22,000 crore last fiscal, plans to invest similar amounts during each of the three years until 2016-17. It has set out a target of 72,250 MW (nearly double the current level) of inter-regional power transfer capacity by the end of this three-year period.
Besides, with equity dilution by the Government no longer an overhang, the stock price is likely to be driven more by the company’s fundamentals.
Power Grid had raised ₹5,321 crore through a follow-on public offer in December 2013. Power Grid gets close to 95 per cent of its revenue from power transmission under the regulated return model, which provides revenue visibility and stability.
Tariffs set by the Central Electricity Regulatory Commission allow the company a complete pass-through of costs plus an assured return on equity of 15.5 per cent on its completed projects. Expansions in transmission capacity therefore, hold the key to revenue growth.
The company has been consistently expanding its transmission line network and inter-regional power transmission capacity over the years. From ₹7,140 crore in 2010-11, Power Grid went on to capitalise assets totalling ₹17,213 crore in 2012-13.
While the company completed projects worth ₹15,904 crore in 2013-14, somewhat lower than that in the year before, the pace seems to have picked up again in the current fiscal. Power Grid’s project completion of ₹4,878 crore in the June 2014 quarter is nearly twice that in the year-ago period. Sustained capacity additions translated into revenue growth of over 20 per cent in 2011-2012 and 2012-2013 and 17 per cent last year.
Well-placed to competeWhile the introduction of tariff-based competitive bidding for inter-state transmission projects since 2011 has seen the entry of private participants, Power Grid is still the dominant player.
While most new transmission projects are now being allotted through competitive bidding, given its long years of experience in project execution Power Grid is well-placed to compete with new private players. As on March 2014, it had won five projects, accounting for about 40 per cent of the projects put up for bidding. A bulk of Power Grid’s planned capex in the next two-three years is to be spent on implementation of projects that it bagged under the regulated return model.
So, the company’s earnings are unlikely to take any major hit in the medium term on account of the new competitively bid transmission projects.