Capex push tilts the scales for Power Grid, Citi laps it up

Shortage of coal, falling power tariffs and deteriorating finances of state electricity boards (SEBs) might paint a grim picture for the power sector. But believe it, these are precisely the reasons which influenced Citi Investment Research & Analysis (Citi) to go for Power Grid Corporation of India (PGCIL) as its top pick.

According to Citi, PGCIL is expected to notch up a 15 percent growth in its profit over the next three years. Though the aforesaid uncertainty will have a bearing on the company’s growth, Citi has factored them allbefore arriving at a target price of Rs 118 for the stock. PGCIL trades at Rs 99.25 per share.

The report makes it a point to mention that in the 11th Plan, the company will push through a capital expenditure of Rs 48,900 crore as against a target of Rs 54,500 crore, implying an achievement of 89 percent of the target compared to 85 percent in the 10th Plan.

PGCIL as India’s central transmission utility operates regional and national power grids, thusfacilitating transfer of power within and across regions. The company carries as much as 45 percent of India’s generated electricity. Recently, PGCIL has diversified to provide telecom services and consultancy for transmission and distribution projects in India and abroad.

There is a word of caution, though. Citi points to the deteriorating receivable position. Till the previous fiscal, PGCIL would receive its billed amount within 30 days. However, in the current fiscal, Delhi, Tamil Nadu and Bihar have started availing of 60 days of grace period for clearing dues. Furthermore, Daman, Diu and certain north-eastern states continue to default beyond 60 days.

Receivable days have gone up from 113 in fiscal 2010 to 141 in fiscal 2011, which is likely to dive further. Citi maintains that this is not a cause of concern as the deterioration is due to change in sales recognition as per tariff block for the period 2009-14 compared to the earlier block of 2004-09. On 2 May, 2011, theCentral Electricity Regulatory Commission (CERC) decided to grant provisional tariff of up to 95 percent of annual fixed cost, which should help bring down receivable days, going forward.

At the target price set by Citi, PGCIL will still be trading at a discount of 12 percent of its historic average valuation of 2.5 times its book value.