Is Power Grid nearing its peak earnings?


Is Power Grid Corp. of India Ltd, considered the best utility play in the country due to its superior returns profile and financial track record, entering the slow lane?

True, the March quarter results do not indicate any such slowdown. In fact, the company ended the last fiscal year (FY17) with the highest ever yearly capital expenditure (capex). Capitalization also remained strong.

Power Grid earns fixed returns on the commissioned assets. As long as it keeps up capex and asset commissioning momentum, investors can be assured of the earnings performance.

In the five years to 2016-17, as capitalization (project commissioning) on an average grew about 18% per annum, profits also expanded at a similar pace.

With Power Grid incurring record capex in the previous fiscal year and commissioning a large part of the assets towards the fag-end of the year, many analysts expect the company’s earnings momentum to remain strong in the current fiscal year (FY18) also.

The problem may arise after FY18, with some analysts doubting if the company will be able to maintain the current momentum in earnings.

One reason is the reducing scope for large-scale transmission projects. Opportunities now are more in the state sector, where Power Grid has a limited presence.

The second is competitive bidding. Around a fourth of the company’s future projects are expected to be awarded through competition-based bidding. If competition intensifies, project returns can be crimped.

The third is Power Grid’s ability to maintain capitalization levels. The company added around Rs31,000 crore worth of assets per annum in the previous two fiscal years. This is not only the highest in recent years but is also significantly higher than the average annual capex levels.

With an amount of Rs39,000 crore already invested in new projects, capitalization is expected to remain strong in the current fiscal year also.

After FY18, however, some analysts fear capitalization levels can fall or converge with yearly capex levels, slowing down the earnings momentum.

“We factor FY18 capitalisation of around Rs29,000 crore, leading to EPS growth tapering off to 12% by FY19-20. This is because most of the bunched-up projects in current CWIP of Rs35,800 crore will commission by FY18, following which capitalisation will fall to match the capex rate of Rs22,000-23,000 crore per annum. This, coupled with the high base effect, will result in transmission earnings growth tapering off beyond FY18,” JM Financial Institutional Securities Ltd said in a note. EPS is earnings per share. CWIP is capital work in progress.

To be sure, the debate is over sustainability of the current strong earnings momentum. Power Grid has projects worth Rs1.3 trillion in hand. This should help it generate incremental earnings growth. The only question is if the company would be able to generate the strong double-digit growth in earnings it delivered in recent years.

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