Strong growth visible for Power Grid

~1,09,000 crore of projects to start earning returns till FY21

Power Grid, the country’s largest power transmission company, continues to maintain strong capitalisation growth, keeping its prospects firm. Capitalisation indicates the assets (transmission capacity and allied equipment in this case) becoming commercially operational, essential for Power Grid to start earning a return on the amount invested.

Capitalisation in the September quarter (Q2) grew 49 per cent to ~9,970 crore, higher than analysts’ expectations; Elara Capital had estimated at ~7,500 crore. The company added 2,266 km of transmission lines and four substations of 17.5 GVA capacity, which boosted new capacity going commercial.

This strong trend and work-in-progress are keeping analysts bullish. Power Grid has ~88,000 crore worth of ongoing projects and another ~3,000 crore under development.

An additional ~18,000 crore worth projects won under tariff-based competitive bidding takes the total to ~1,09,000 crore. These are estimated to become commercially operational in three years.

Analysts at Emkay Global say they continue to expect annual capitalisation of ~32,500 crore over the next four years and Power Grid to report a compounded annual growth rate (CAGR) of 21.9 per cent in earnings over FY19, with return on equity rising to 18.2 per cent by FY19.

Joint ventures (JVs), consultancy assignments, telecom towers and now new orders from Indian Railways are emerging as growth drivers. The company expects orders from the railways, which has a ~35,000-crore plan for electrification of 33,000 km of routes by 2021-22.

In telecom, the company intends to utilise its tower infrastructure to expand its existing 42,000 km of fibre optic network. The telecom segment income at ~297 crore in the first half has grown 23 per cent over a year and the company added 38 clients (government and private) in Q2.

Among the JVs, it has formed one with Uttar Pradesh Transmission Corporation to develop a intrastate network, giving it entry into the largest state transmission market by capital expenditure, say analysts. This is its second JV, after the first one with Bihar.

Its revenue increased 16 per cent over a year to ~7,250 crore in Q2, driven by 15.8 per cent and 21.3 per cent growth in the transmission (93 per cent of revenue) and the telecom businesses, respectively. Operating profit increased 17 per cent but margins remained largely flat at 89.3 per cent, thanks to elevated wages.

With rise in depreciation and finance costs due to higher capitalisation of assets, net profit grew only 14 per cent over a year. Factoring in elevated depreciation and interest costs from higher capitalisation, analysts at Sharekhan have tweaked their forward estimates but expect earnings to clock a 19 per cent CAGR during FY17-19.