Stock Pick From The Power Sector

The company recommended as the Choice Scrip for this issue is a leader in the power sector in India.

• Aggressive capital expenditure and low dependency on independent power producers.
• The management has no intention of diluting equity for capex.
• No downside risk in consultancy and Open Access operations.
• Its financial position is robust – margins, RoNW, dividend and debtor days are all positive.

In a volatile environment where drastically changing domestic trends and highly uncertain global cues toss the market around in various directions, a stock that has minimal downside risk and has growth dependent on factors that ensure an upside is a must for any portfolio. Based on factors like aggressive capitalisation, the least fuel risk among utility companies, an improving debtor’s position and zero risk in the consultancy and open access operations, Power Grid Corporation of India (PGCIL) is certainly a good buy.

PGCIL, a Navratna PSU, is India’s sole Central Transmission Utility (CTU), responsible for wheeling the power of generating units at the central level and across inter-state systems. Its transmission network is spread across 9228 1 circuit kilometres (ckm), 150 substations and a transformation capacity of 124525 MVA.

While the transmission business accounted for 88 .49 per cent of the total revenues in FY12 and grew by 22.08 per cent, the company’s telecom business (PGCIL has developed a broadband telecom network through overhead optic fibres on its Extra High Voltage Transmission Network) grew by 9.77 per cent. The segment added 11 customers in FY12, and the order book rose to Rs 1050 crore from Rs 650 crore (up by 62 per cent).

PGCIL’s financials have been robust over the years and the company is highly profitable. Its Operating Profit Margin and Net Profit Margin for FY12 stood at 3.52 per cent and 30.18 per cent respectively. Its Return on Net Worth for FY12 was also at a robust 13.57 per cent. Moreover, PGCIL has been a consistent dividend payer over the years, and the stock has a dividend yield of 1.77 per cent.

Recent developments have resulted in the government announcing a debt restructuring package for State Electricity Boards. This would improve the overall health of the power sector and benefit PGCIL in terms of higher topline growth.

In Q1FY13, the company has seen a significant improvement in its new clients and projects under execution as compared to Q1FY12. The company also announced recently that it would invest Rs 1327.74 crore for strengthening two transmission systems in the northern region as part of the Northern Region System Strengthening Schemes. The stock has yielded a return of 20.32 per cent this fiscal. Aggressive capital expenditure combined with a healthy pipeline of orders and a limited downside risk make this stock a strong buy.