Nomura pegs Power Grid Corporation a BUY at Rs140

Moneylife Digital Team 15 February 2013

Power Grid Corporation’s muted earnings and certain risk factors continue to remain. Despite somewhat negative news, Nomura remains upbeat on the power utility. The management of the company remains tight-lipped about divestment rumours

Nomura takeaways from the Power Grid Corporation (PGC) analyst meet noted that despite disappointing earnings and risk of “equity overhang”, it expects company to do well going forward. Nomura said in its report: “We remain upbeat on PGC but note that the risk of an equity overhang (secondary and/or primary issuance) seems to have resurfaced.” Nomura is referring to the divestment agenda, possibly in FY14, which could dilute shareholders’ returns vis-à-vis higher number of shares in the market. However, the management is tight-lipped about the same.

The results of PGC were average at best. The company recorded sales of Rs32,617 million as against a consensus of Rs31,698 million, which is 2.9% higher. Its EBITDA was at 28,231 million which is 4.5% higher than the EBITDA. However, reported PAT was 10% higher than consensus at Rs11,291 million.

One of the main concerns about Power Grid Corporation despite its dominance in the Indian power utilities market is the gap between capex committed and asset commissioned i.e. the gestation period of the an investment. Being a capital intensive business, in a sector besotted and riddled with problems, red tape and corruption, it is a plausible concern. The management, however, has downplayed concerns. The report cited, ”management reiterated focus on minimizing the gap between capex and commissioning, but alluded that ramp-up in commissioning to match the step-up in capex of Rs200 billion per year in the 12th Plan would take time”. Normally, it would take around two to three years to get a project from start to finish.

This brings us to focus another important aspect of the company—receivables. Is it having enough current assets to fund day-to-day operations? In an industry characterised by long gestation periods, cash-flow from existing project prove crucial, especially those projects where break even is yet to occur. The Nomura report said, “Overdue receivables remain broadly in check, debtors outstanding for greater than 60 days stood at Rs5.5 billion, of which Rs3 billion relate to dispute in Point of Connection (PoC) charges issued by the regulator.

While the company is in line to achieve its targeted capex and has been awarded several contracts, the issue is when it can complete projects and earn more cash. Short-term open access (SOTA) seems to be healthy and up for the third quarter (22.5%) ended December 2012. SOTA refers to the market where corporate and state government bid for short-term electricity, mostly on a needs basis. Sometimes, power purchase agreements (PPA) with individual power plant break down and the only way to access power is by buying it from a grid.

Despite short-comings, Nomura remain bullish. The report concludes, saying, “PGC remains our top pick in the power utilities space on the back of a robust earnings outlook and a highly execution-focused management."

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