Power Grid Corporation’s profit growth has been robust for the past five quarters, after the slowdown in mid- 2011. In the past two quarters, its profit touched new highs — . 1,126 crore in the September quarter and . 1,129 crore in December. Power Grid also ensured that its debt-to-equity ratio settles at an acceptable 70:30.
The street, however, appears to have ignored all these positives, for the stock has been a laggard. It has fallen almost 3% over the past year, at a time Sensex gained over 4.8%. In the few days after the December quarter results, the stock declined over 5%, when the Sensex shed just 1.2%. With analysts too recommending the stock, it is all the more puzzling as to why the Power Grid is plunging. One of the market’s concerns could be the company’s investment target of . 1 lakh crore for the 12th Five-Year Plan period, for which, it is feared, the company may have to dilute equity.
The envisaged annual capital expenditure target is . 20,000 crore, to be funded by . 14,000 crore of debt and . 6,000 crore of equity, if it sticks to a 70:30 debt-to-equity ratio. The company’s operational cash flows are adequate to meet this target, which implies that it will not have to dilute equity.
An important positive for the company is that its financial returns are improving, with more projects becoming operational. A report by Citi Research says that Power Grid’s return on equity, or RoE, will be over 17% over the next three years. Besides, it is able to generate incremental earnings through telecom, consultancy and other businesses.
A flattish trend in its stock price and an improvement in earnings have led to a steady fall in the company’s valuations. Power Grid is now trading at a historical low price-to-earnings ratio of 11.9. Retail investors may be frustrated with the languishing stock, but they would be better off if they are patient enough.
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