Makes Powerful Sense - Power Grid Corporation of India

In turbulent times, it is better to stick to a business that generates steady revenues. Considering the current circumstances that the market is in, we are recommending Power Grid Corporation as our Low Priced Scrip for this issue. However, there is more to the scrip apart from the steady revenues that the company generates. Ameliorated revenue growth on account of better capitalisation of assets, improvement in the debtor days, healthy revenues from the telecom segment and a consistent dividend payment are some of the other compelling factors that go in favour of the scrip.

Power Grid is India’s largest power transmission company, and enjoys Navratna status. It owns and operates a transmission network of about 82355 circuit kilometers (Ckm), and 135 substations with a total transformation capacity of about 93050 MVA, which is more than 50 per cent of the total power generated in the country. As we said, the first and the foremost factor for recommending the counter is the consistent revenue generation of the company. In the current turbulent times, when many companies are witnessing a slowdown in topline, Power Grid has reported a sustained growth in FY11 and in Q1 FY12 too.

The revenues of Power Grid are dependent on its capex and assets that come on stream. More transmission lines getting on stream is expected to drive the growth of the company going forward. Due to some procedural delays, a slight decline in capex was seen in H1 FY12. However, the management has stated that the slippages are likely to be recouped in H2 FY12, and its overall capex in FY12 is expected to be around Rs 90000 crore. It has already planned for similar capex in FY13 too. Therefore, considering the sustained growth in capex, higher private participation in the generation capacity, stricter adherence to commencement schedules and a strong execution capability, we expect the EPS to improve in FY12 as well as in FY13. The company is also expected to bring its debtor days to below 100 from the current level of 120. Both these factors are expected to help the company perform better.

Apart from transmission, the company operates in the telecom and consultancy business. In the telecom business, it manages a telecom cable network of 25000 km. Going ahead, telecom is expected to witness a healthy growth, as more towers are leased out. The consultancy business is likely to remain stagnant. However, at two and three per cent, the contribution to revenue is quite low and hence, it hardly makes any impact.

Power Grid has been a consistent dividend-paying company, with a dividend yield of two per cent (ex-dividend). Even the FIIs have increased the investments to 13.46 per cent for the June 2011 quarter from 12.05 per cent in December 2010. The financial performance of the company has been good, and this is quite evident from the fact that the topline and bottomline have witnessed consistent growth in the past eight fiscals. On the valuation front, its CMP of Rs 96 discounts its trailing four quarter earnings by 16x, and the price to book value stands at 2.13x. With a consistent capex and asset capitalisation, we expect revenues and earnings to grow, and our recommendation to investors is to buy the scrip at its current levels, with a target price of Rs 115 in the next one year.