Power Grid Corporation Equity Research

Date of Research – 20 January 2016

Price – Rs. 134.25

About the Company

Power Grid Corporation of India Limited (“Power Grid” or the “Company”) is amongst the largest power transmission utilities in the world. It is managed and run by the Ministry of Power, Government of India.

Headquartered in Gurgaon, the Company owns and operates about 96,216 kms of transmission lines and 158 sub-stations with transformation capacity of about 1, 51,303 Megavolt ampere (MVA) as on 31st December 2012. Power Grid also owns and operates a telecom network of approximately 25,000 kms connecting approximately 206 cities in India that offers bandwidth capacity leasing, internet access lines, multi protocol label switching based VPN, and broadband internet services to telecom service providers, government agencies, and international telecom players.

In addition, the Company offers consultancy services for the construction of transmission lines and substations, and rural electrification in India, Afghanistan, Bangladesh, Bhutan, Ethiopia, Kenya, Myanmar, Nepal, Nigeria, Tajikistan, Sri Lanka, and the United Arab Emirates.

The numbers for FY 2009 and FY 2010 are standalone whereas for FY 2011 and FY 2012, numbers are consolidated as Power Grid’s wholly owned subsidiary “Power System Operation Corporation Limited (POSOCO)”; was formed in March 2010.

Key Financial Figures

Consolidated(Rs. Cr)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations13,163.9015,675.4317,658.5121,352.32 25,703.91 
Expenses1,950.052,454.082,579.502,747.63 3,116.60  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit)11,213.8513,221.3515,079.0118,604.69 22,587.31  
Depreciation3,427.804,079.385,173.336,302.18 7,722.25  
Finance Costs2,599.443,253.664,081.235,085.95 6,203.55  
Other income563.22470.69574.53428.44 583.81  
Exceptional items(25.80)0.05 (141.75) 
PBT5,775.636,359.006,398.987,644.95 9,387.07  
Tax1,463.021,811.421,356.121,630.39 2,006.27  
PAT (before Minority Interest and share of Associates)4,312.614,547.585,046.256,014.56 7,450.73  
Profit/ (loss) attributable to Minority Interest– – 
Share of profit / (loss) of Associates– – 
Consolidated Profit / (Loss) for the year4,312.614,547.585,046.256,014.56 7,450.73  

Profitability Analysis

Consolidated(%)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Operating Profit Margin Ratio85.1984.3485.3987.13 87.87 
Net Profit Margin Ratio32.7629.0128.5828.17 28.99

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016 
Share Capital4,629.734,629.735,231.595,231.595,231.59 
Reserves & Surplus18,953.4821,773.3829,466.3533,207.1437,736.09 
Deferred revenue2,332.753,766.484,567.054,812.595,773.29 
Net worth (shareholders funds)23,583.2130,169.5939,264.9943,251.3248,740.97 
Long term borrowings50,005.7364,030.1477,772.1390,492.471,01,775.73 
Deferred Income/(Expenditure) From Foreign Currency Fluctuation (Net)493.17– 
Current liabilities14,219.3715,702.6319,978.2922,790.1526,812.35 
Other long term liabilities and provisions1,911.201,506.692,021.881,739.892,065.98 
Deferred Tax Liabilities1,594.561,975.032,452.452,490.452,524.51 
Total Liabilities94,139.991,13,384.081,41,489.741,60,764.281,81,919.54 

 

Application of Funds / Assets(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016 
Fixed Assets64,663.6482,040.091,06,642.811,31,667.101,52,670.08 
Noncurrent Investments573.86390.63206.2719.4914.50 
Current assets9,304.527,441.229,771.978,883.7811,126.58 
Long term advances and other noncurrent assets5,644.536,002.034,700.194,147.133,925.94 
Construction stores12,636.7715,793.8217,677.9313,205.2410,350.69 
Deferred foreign currency fluctuation asset1,316.671,716.292,490.572,841.543,831.75 
Total assets94,139.991,13,384.081,41,489.741,60,764.281,81,919.54 

Efficiency Analysis

 
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016 
ROCE11.5011.9011.3011.2712.36 
ROE / RONW14.0114.2911.5811.6712.34 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations (Rs. Cr.)13,163.9015,675.4317,658.5121,352.32 25,703.91 
Growth (%)27.66 %19.08 %12.65 %20.92 % 20.38% 
PAT (Rs. Cr.)4,312.614,547.585,046.256,014.56 7,450.73  
Growth (%)30.57 %5.45 %10.97 %19.19 % 23.88 % 
Earnings Per Share – Basic (Rs. )9.329.479.6511.50 14.24 
Earning Per Share – Diluted (Rs. )9.329.479.6511.50 14.11 
Price to Earnings11.3713.2214.8912.10 14.55 

Dividend History

The Company has maintained an average dividend yield of 1.82 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Power Grid’s average current ratio over the last 5 financial years has been 0.59 times.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Power Grid’s average long term debt to equity ratio over the last 5 financial years has been 2.02 times which indicates that the Company operates with huge debt. Also Read – Power Stocks : Deep Value or Junk Buying?

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Power Grid’s average interest coverage ratio over the last 5 financial years has been 4.12 times which indicates that the Company has been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Power Grid reported a promoter holding of 57.90 %.Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 34.73 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participant

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.