Power Grid Corp. of India disappoints with 1QFY15 earnings

While its GFA is up INR49bn.

At INR34bn, the Power Grid Corp. of India’s (PWGR’s) 1QFY15 normalized EBITDA came in 8%/4% below Nomura’s and consensus forecasts, while, at INR11.7bn, normalized PAT missed Nomura’s and consensus forecasts by 8%/6%, with reported PAT at INR11.4bn.

According to a research report from Nomura, meanwhile, total revenues at INR39.4bn were 8% below its forecast.

About 70% of the top-line miss was on account of a surprisingly meek 3% QoQ growth in core transmission revenues to INR38.1bn (vs. Nomura’s forecast of INR40.5bn) despite robust effective incremental capitalization.

Further, the balance of the shortfall was largely on account of low consultancy division revenues, which the report noted could be arguably lumpy in nature.

PWGR has considered deferred tax relating to the transmission income as ‘recoverable from the customers’ under the new tariff regime.

Here’s more from Nomura:

Accordingly, while effective tax rate is ~28% (in line with our forecast), net profit has been calculated after adding back ~INR1.3bn of deferred tax provision relating to the core transmission business.

If deferred tax is deemed not to be recoverable, 1QFY15 normalized PAT would be lower at INR10.4bn.

Post our brief interaction with management, we understand that GFA stood at ~INR1014bn as of June 2014, implying asset capitalization – i.e., commercial start-up of transmission capacity in 1QFY15 was INR49bn (vs. INR29bn in 1QFY14).

Earnings are below our/consensus forecast; sequential transmission revenue growth is surprisingly weak.

At INR49bn, GFA accretion in 1QFY15 is sharply higher YoY (INR29bn in 1QFY14); however, incremental GFA accretion in June seems negligible.

Considering that in its analysts’ meet on May 30, management had indicated YTD transmission capacity capitalization in the first two months of FY15 (April-May) at ~INR49bn, incremental capacity start-up in June 2014 seems to be negligible.

1QFY15 financials have been prepared per Central Electricity Regulator’s

(CERC’s) 2014-19 tariff regulations, which provide that the recovery of Income Tax from customers (beneficiaries) is to be based on the effective tax rate for a financial year, which, in turn, shall be based on the actual tax paid during the year.

PWGR’s interpretation of this provision considers deferred tax liability relating to transmission segment provided in 1QFY15 as recoverable from beneficiaries, as it would be recovered in the form of current tax in future period in terms of the tariff norms.

Interestingly, NTPC (NTPC IN, Buy), has not interpreted the provision in the manner (as we evident in its 1QFY15 results released last week).

By our calculations, effective return on average regulated equity in 1QFY15 appears to be ~16%.