Power Grid: Investors should look beyond Q4

Strong order book to drive earnings in FY18-22, say analysts

Power Grid’s March quarter (Q4) performance, announced after market hours on Tuesday, saw earnings grow at a moderate pace, partly due to exceptional items. Yet, its share price gained 1.1 per cent on Wednesday.

The optimism stems from analyst expectations of a pickup in asset capitalisation and capital expenditure (capex) by India’s largest power transmission company. Capitalisation refers to commercial start of a project. Fear of slow growth in capitalisation was one reason for the stock lagging in the second half of 2017-18.

Net profit for FY18 grew 10 per cent over a year, weighed down by employee-related provisions of ~3.5 billion. Q4 profit grew at a slower five per cent over a year, impacted by higher other expenses. At ~20.05 billion, the Q4 figure was also 11 per cent lower than the Bloomberg consensus estimate. Analysts estimate the higher other expenses to be on account of foreign exchange variation, whereas the higher employee cost on account of wage provisioning would be recoverable through rate increases.

Importantly Power Grid completed 2,934 circuit km of transmission lines and 7,235 MVA of substations in Q4, versus 5,965 circuit km in the first nine months of FY18. Which is encouraging, feel analysts. Asset capitalisation of ~78 billion during Q4 and ~274 billion in FY18 were in line with expectations. Analysts at Kotak Institutional Equities say outstanding approvals stand at ~820 billion, lending visibility to asset capitalisation for another three years. Hence, the outlook is strong till FY21.

Other factors add to analysts’ confidence. From the current cost plus 15.5 per cent return on equity (RoE) regime, Power Grid is winning incremental orders under tariffbased competitive bids (TBCB), which will lessen regulatory risk, as returns for such projects will not be reset every five years, say analysts at ICICI Securities. Motilal Oswal Securities, too, remains confident of strong double-digit IRR (internal rate of return) in TBCB projects. The consultancy and telecom businesses are also expected to grow 15-20 per cent, going ahead.

With ~1 trillion of orders pending execution, analysts estimate earnings to grow 12 per cent annually over FY1822. The defensive nature of the company’s business, inexpensive valuations and rising dividend yields should support the stock, says an analyst.