79
(^) Outlook BUSINESS / (^) 22 December 2017
also expanded its footprint internationally and is now
targeting Saarc and African markets.
In FY 17 , the company capitalised about # 31 , 000 crore
and incurred a capex of # 24 , 429 crore. The manage-
ment intends to increase the capex to capitalisation
ratio above 1. 0 in the immediate future. Powergrid is
likely to commission projects worth # 1. 24 lakh crore
over the next four to fi ve years, backed by strong vis-
ibility in the tariff -based competitive bidding. Total
work in hand was # 1. 3 lakh crore at the end of FY 17 , of
which # 39 , 000 crore was capital work in progress. The
company intends to execute the balance # 91 , 000 crore
over the next three years or so. In FY 18 , the company
plans to execute # 25 , 000 crore, which implies that for
the next two years it will witness higher-than-average
capex of # 30 , 000 crore. Hence, the capex and capi-
talisation rates can converge to around # 30 , 000 crore.
LONG-TERM STORY
If the government’s eff orts to revitalise the renew-
ables sector succeeds, this will further boost Power-
grid’s prospects. We can expect this to play out in the
next fi ve years. This could provide an upside to the
stock, though it is diffi cult to make an estimate now.
The company has delivered 20 % CAGR in sales ov er
the past six years. In FY 18 , revenues increased by 17 %
in fi rst half to # 14 , 882 crore, with an operating mar-
gin of 89 %. Income from other verticals such as tele-
com are low, but growing fast. Powergrid has well-
managed its working capital, refl ected in healthy
operating cash fl ows. The receivable overhang is just
40 days and it has also managed to keep the debt-to-
equity ratio consistent at 70 : 30 for the last few years.
As the company is expected to sustain the capitali-
sation rate and improve on capex in the next three to
four years, it will sustain the earnings momentum,
though higher base eff ect comes into play. The earn-
ings per share growth is expected to be in the 20 %-
plus range over the next three to four years, while
ROE is expected to be in the region of 16 %. At current
levels, the stock is trading at a price to book of 1. 3 x
(FY 19 estimates) and looks reasonable.
Powergrid is the best stock in the utilities seg-
ment with unmatched operating parameters com-
pared with its peers. Given its dominant position in
the transmission segment, there may not be enough
headroom in terms of market share growth. However,
with Powergrid’s competitive strength and diversifi -
cation of revenues, the stock can deliver at least 3 x
return in the next four to fi ve years, implying a com-
pounded return of 25 % annually. b
The writer has an interest in the stock
Getting better at it
Powergrid wants to maintain the capitalisation to capex ratio at more than one and
has been effi ciently managing its capital work in progress
FY15 FY16 FY17
~ in‘000 cr ~ in‘000 cr CWIP (Installed)
22.521.8 22.6
31.8
24.4
31
FY12 FY13 FY14 FY15 FY16 FY17
15.6
19.1
31.9
39.9
28.2
34
as per Ind AS for FY17; FY17 includes tariff-based competitive bidding Source: Company as per Ind AS for FY17 Source: Company
CY17 RETURN 11%
net profit#7 ,309cr
ttm p/e (x) 13
roce9.9%
Capex Capitalisation