Power Grid: High on power

The stock price of Power Grid Corporation of India (Power Grid) has run up 32 per cent in the last year. At ₹210 per share, it quotes at a price-to-earnings ratio of about 15 times, close to its three-year average. The price-to-book ratio of 2.2 times is also in line with its historical averages.

The stock offers a defensive and stable bet on the growing power transmission business, especially in runaway markets such as now. With good revenue visibility for the next 3-4 years, strong leadership position as well as excellent track record in project execution, Power Grid should continue to grow its sales and profit at a fast pace. Investors can park money with a long-term perspective in this stock that has a track record of consistently growing sales and profit upwards of 15 per cent year-after-year.

One of the PSU Navratnas, Power Grid enjoys near-monopoly in the country’s inter-state and inter-regional power transmission network. It carries 45 per cent of overall power supply in the country by operating over 1,25,000 circuit km (cKM) of transmission network; second only to the Grid Corporation of China in the world.

It has a relatively safe business model than, say, a power producer, given that it earns assured return on equity (ROE) of 15.5 per cent for the projects commissioned. So, the company’s revenue growth is largely tied to the expansion of its transmission network capacity.

The company’s capital investment has been strong in the last five years — averaging ₹22,500 crore annually. It has consistently surpassed annual investment targets set under the XIIth Plan. During 2012-17, as against the investment target of ₹1,10,000 crore, it achieved ₹1,12,664 crore. In FY-17, as against the target investment of ₹22,550 crore, it made the highest investment so far of ₹24,429 crore.

The company outdid its targets for transmission, sub-station and transformation capacity for the five-year period by 104 per cent, 112 per cent and 155 per cent respectively. During the period, it laid 41,769 cKm of transmission lines, 67 sub-stations and 1,55,837 MVA (mega volt amp) of transformation capacity.

The investment momentum is set to continue. The transmission sector in India envisages investment of ₹2,60,000 crore over the next five years and is expected to add physical capacity of 1,06,000 circuit KM (cKM) of transmission lines and 2,92, 000 MVA of transformation capacity. Power Grid is expected to invest about ₹1,00,000 crore over the next five years. Government initiatives to provide 24x7 affordable power for all by 2019 as well as integration of renewable power (175 GW) by 2022 will propel further growth for the transmission sector.

Additionally, rapid rise in per-capita power consumption and connectivity to energy-surplus SAARC nations will give investments a boost. Moreover, challenges in right of way or congestion in transmission capacity provide good opportunity for investments into high-capacity inter-state transmission network.

Power Grid currently has an order book of ₹1,30,000 crore, of which ₹1,05,000 crore is for ongoing projects and ₹20,000 crore for TBCB (tariff-based competitive bidding) -based projects. In case of the latter, the compensation is not regulated by the regulator CERC.However, it is continuing to bag TBCB-based projects and has won handful of them won through a competitive bidding process. Recently it was declared the successful bidder for a 765kV transmission project in the eastern region.

While the company runs the risk of regulated return on equity being revised, post FY-19, with drafting of new tariff regulations, high investments is expected to keep its growth momentum strong. Investments are likely to be about ₹25,000-30,000 crore annually over the next 3-4 years.

With revenue and profit linked to capitalisation or commissioning of assets, assets being made operational is key to revenue. Power Grid has scored on this front, with its capitalisation-to-capex ratio being more than one in the last two financial years. Capitalisation-to-capex ratio was at 1.41 in FY-16 1.27 in FY-17. A ratio higher than one means that the company has been able to make more assets operational than its capex for the year. In FY-17, capitalisation was to the tune of ₹31, 000 crore and capex ₹24,429 crore. During 2016-17, the company completed a number of important inter-regional transmission lines, including Champa-Kurukshetra line, Angul-Srikakulam line and Wardha - Nizamabad line.

The management expects capitalisation-to-capex ratio to remain above 1.0 for FY-18 and FY-19 as well. About Rs 30,000-35,000 crore of capitalisation is expected over the next 3-4 years, as per the management.

In FY-17, Power Grid’s network was up most of the time (99.8 percent).

The company’s sales were up 25 percent in 2016-17 y-o-y to Rs 25,703 crore. Sales have been growing consistently at an annual average of 20 percent over the last five years. About 93 per cent of its revenues were from transmission business, while consultancy services and telecom contributed about 2 per cent each. The company is tapping new areas such as railway electrification and leveraging of tower infrastructure to grow its non-transmission business.

Net profit for 2016-17 was up 25 percent to Rs 7,450 crore. Profit has grown at an annual average of 17.6 percent in the last five years. During 2016-17, employee expenses were up 39 percent due to one-time gratuity provisions.

The company enjoys high margins. Its operating margin was 91 per cent in FY-17 while net profit margin was 29 per cent.

Power Grid had about Rs 1.18 lakh crore of debt on its books as of March 2017. The company’s debt-to-equity ratio moderated from 2.4 times as of March 2016 to 2.3 times as of March 2017. Going forward, internal accruals are expected to increasingly fund the investment requirements of the company.