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Given its assured return model, Power Grid Corp. of India Ltd grows revenue by adding capacity. In the March quarter, project capitalization, or addition to the gross block which will subsequently reflect in increased revenues, stood at Rs.6,352 crore, lower than Street estimates.
Execution delays have been the main reason for the slip-up in capacity addition. However, the company has already capitalized some Rs.3,000 crore worth of projects in the current quarter. Its capital work in progress also stood at Rs.53,330 crore, up one-third from a year ago, indicating a healthy pace of capitalization in the current fiscal year. The management indicated in a post-results conference call that it was looking to capitalize Rs.22,000 crore annually in the remaining three years of the 12th Five-Year Plan (2012-17).
A further fillip to growth will come if the new government solves the structural problems in the power sector and ordering activity picks up. But that will take some time and be a bonus. According to estimates by Emkay Global Financial Services Ltd, PowerGrid has a Rs.35,000 crore pipeline of projects, which will be sufficient to meet the company's capacity-addition estimates in 2014-15.
The main concern for investors in recent times, notwithstanding PowerGrid's track record, is the delay in execution. Not only does it hit growth prospects, it also sparks fears of a further equity dilution since the company has deployed nearly half the money raised in its follow-on share sale. Power Grid's debt-to-equity ratio stood at 70:30 at the end of March, but that was achieved after the sale of shares.
The equity dilution has been one reason why the stock has underperformed the BSE Power index since the beginning of October. The other, of course, has been the severely beaten down valuations of other power sector stocks, which bounced up. PowerGrid's overall fundamentals remain strong. However, even if the fears of sub-normal returns from competitively bid projects and further equity dilution are brushed aside, the stock will at best provide steady returns based on its capacity addition.
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