Powergrid’s stock holds potential to outperform the Sensex

MUMBAI: Powergrid’s stock has underperformed the Sensex due to the possibility of stake sale in the company. After the recent stake sale in the other PSUs at a significant discount to the market price, street is weary of investing in the Powergrid stock. However, Powergrid’s stock has already factored in this possibility and is trading at a very attractive valuation. The company has strong fundamentals and its stock holds the potential to outperform the Sensex in the next one year.

The company has planned a capital expenditure of Rs 1 lakh crore from FY12-FY17 and this will mostly be done through internal accruals and debt. It has already tied up with the power generators for 82% of this investments and a fixed return on investment of 15.5%, out of which 80% of the capacities will be operational by FY17. This ensures high earning growth visibility till FY17. Analysts expect the earnings to grow by at least 15% year on year for the next 5 years. Also the company has no fuel or any other kind of risks and has not much operational cost and enjoys high profitability. Its operating margin is around 90% for the last 10 years.

The company’s stock is trading at a price to earning multiple of 12, at 40% discount to the historical average. This has encouraged analysts of multinational brokerages such as JP Morgan, CLSA, Goldman Sacchs and BNP Paribas to give a buy rating to this stock. All these analysts have given a target price of around Rs 140 per share, which is 30% above the current market price.