Retaining its power

NEWS FEED: the Hindu Business line


http://www.thehindubusinessline.com/money-wise/stock-insight/retaining-its-power/article7167298.ece

The company’s dominance in the power transmission space gives it the edge

May 3, 2015:  

Investors can consider buying the stock of Power Grid Corporation of India (Power Grid), the country’s principal power transmission company. The stock, up marginally since our ‘buy’ recommendation in September 2014, has scope for further upside.

At ₹142, the Power Grid stock is reasonably valued. It discounts its estimated 2015-16 earnings by 12.2 times and its estimated book value by 1.8 times, at the lower end of its five-year valuation bands.

The cost-plus tariffs set by the Central Electricity Regulatory Commission, allow Power Grid to recoup costs and earn a pre-tax return on equity (ROE) of 15.5 per cent on its completed projects. This provides certainty on the revenue front. Besides, projects completed on or after April 2014 enjoy an additional 0.5 per cent ROE for completion within a certain time period.

Capacity addition

Expansion in transmission capacity holds the key to growth. Power Grid has been delivering well on this front. It had a transmission line network of 113,838 circuit km and inter-regional transmission capacity of 42,150 MW as on February 2015, 7 per cent and 11 per cent higher from about a year ago.

It completed projects worth ₹16,774 crore during the nine-month period ended December 2014, a third more than that in the year-ago period; with over 40 per cent of the increase achieved in the December quarter.

This is reflected in the 18 per cent growth in both revenue and net profit in the December quarter, a sharp improvement over the preceding two quarters.

With more projects lined up in the coming year, Power Grid is set for healthy revenue growth.

The company has been growing its transmission assets at about 20 per cent year-on-year for many quarters now.

Posting a higher 26 per cent growth in the December 2014 quarter, Power Grid upped its gross fixed assets base to ₹1.1 lakh crore from ₹0.9 lakh crore. This should translate into more project completion and higher revenues in the years ahead.

Still dominant

While the entry of private players has brought in competition in the inter-state power transmission sector, Power Grid continues to enjoy dominance. It has so far won six projects under the tariff-based competitive bidding. These projects though account for a very small share of the company’s project portfolio, with the bulk of the revenue coming from the regulated return projects.

Also Power Grid can still acquire projects outside the competitive bidding mechanism. The existing rules permit the government to nominate Power Grid in situations where the project is technologically complex or requires urgent implementation. Recently, the government assigned eight such transmission projects worth ₹36,264 crore to the company. Power Grid has also been assigned the Green Energy Corridor project — the transmission network for solar parks across seven states