Power Grid Corporation Q2 FY26: Margin Compression Weighs on Profitability Despite Steady Revenue

The quarter's results paint a concerning picture of margin erosion despite modest revenue growth. Net sales increased 2.50% sequentially to ₹11,475.95 crores from ₹11,196.22 crores in Q1 FY26, representing a year-on-year growth of just 1.76%. However, this top-line expansion failed to translate into bottom-line growth, primarily due to significant margin compression and elevated interest costs. The company's operating profit margin excluding other income contracted sharply to 79.42% in Q2 FY26 from 81.69% in the previous quarter and 86.02% in the year-ago period, marking the lowest level in at least seven quarters.

Financial Performance: Margin Pressure Undermines Profitability

Power Grid Corporation's Q2 FY26 financial performance reveals a troubling divergence between revenue trajectory and profitability metrics. Whilst net sales demonstrated resilience with a 2.50% quarter-on-quarter increase, the company's ability to convert this revenue into profits deteriorated markedly. The operating profit before depreciation, interest, and tax (excluding other income) stood at ₹9,113.74 crores, representing the lowest quarterly figure in the recent trend and reflecting compressed operational efficiency.

The margin contraction stems from multiple pressure points. Employee costs rose to ₹668.04 crores in Q2 FY26 from ₹640.57 crores in the previous quarter, whilst interest expenses surged 11.05% sequentially to ₹2,148.07 crores from ₹1,934.28 crores. This interest burden increase is particularly concerning given the company's substantial debt load of ₹1,09,857.95 crores as of March 2025, translating to a net debt-to-equity ratio of 1.31 times. The profit after tax margin compressed to 26.57% from 30.53% in Q1 FY26 and 31.45% in Q2 FY25, reflecting the cumulative impact of operational and financial headwinds.

Other income provided some cushion, declining to ₹194.29 crores in Q2 FY26 from ₹248.20 crores in the previous quarter but remaining significantly below the ₹568.17 crores recorded in Q2 FY25. This year-on-year decline of 65.81% in other income further pressured overall profitability, as the company could not rely on non-operating income to offset operational margin weakness.

Quarterly Trend Analysis: Consistent Deterioration in Key Metrics

The quarterly trend analysis reveals a clear pattern of deteriorating operational efficiency. Operating margins have declined consistently from a peak of 87.25% in Jun'24 to the current 79.42%, representing a degradation of nearly 783 basis points over five quarters. Similarly, PAT margins have contracted from 36.25% in Mar'24 to 26.57% currently, a substantial erosion of 968 basis points that underscores mounting profitability challenges.

Operational Efficiency: ROE Strength Masks Underlying Concerns

Despite the margin pressures, Power Grid Corporation maintains a respectable return on equity of 18.07% on an average basis, demonstrating reasonably efficient capital deployment. This ROE figure, whilst strong in absolute terms and superior to many peers in the power transmission sector, reflects the company's ability to generate returns for shareholders even amidst operational headwinds. The company's average return on capital employed stands at 12.16%, which whilst positive, appears relatively modest given the regulated nature of the business and the inherent stability it provides.

The company's balance sheet reveals a capital-intensive business model with fixed assets of ₹1,72,320.17 crores as of March 2025, supported by long-term debt of ₹1,09,857.95 crores and shareholder funds of ₹92,662.81 crores. The debt-to-EBITDA ratio of 3.48 times indicates moderate leverage, typical for infrastructure utilities, though the interest coverage ratio of 2.95 times suggests limited headroom for additional debt servicing capacity. With interest expenses consuming a substantial portion of operating profits, any further increase in borrowing costs could materially impact profitability.

Cash flow generation remains robust, with cash flow from operations reaching ₹36,223 crores in FY25, providing adequate resources for capital expenditure and debt servicing. However, the company deployed ₹23,533 crores in investing activities during FY25, primarily for network expansion and asset creation, whilst cash outflow from financing activities totalled ₹12,357 crores, reflecting debt repayments and dividend distributions.

Industry Context: Regulated Returns Amid Infrastructure Expansion

Power Grid operates in a regulated environment where returns are governed by tariff mechanisms set by the Central Electricity Regulatory Commission. The company's transmission infrastructure forms the backbone of India's power sector, connecting generation sources with distribution networks across states. The regulated nature provides revenue visibility but also constrains margin expansion potential, as tariffs are typically reset periodically based on normative parameters rather than actual costs.

India's growing power demand and the government's focus on renewable energy integration necessitate substantial transmission infrastructure investments. Power Grid's role as the primary inter-state transmission system operator positions it favourably to capitalise on this expansion. However, the capital-intensive nature of projects, coupled with regulatory lag in tariff adjustments and rising interest costs, can pressure near-term profitability even as the asset base expands.

The company's consultancy and telecom services provide marginal revenue diversification, though transmission tariffs remain the dominant revenue driver. With India targeting 500 GW of renewable energy capacity by 2030, the need for robust transmission infrastructure will remain critical, potentially supporting Power Grid's long-term growth trajectory despite current profitability headwinds.

Peer Comparison: Valuation Premium Despite Weaker Momentum

Power Grid's valuation positioning within the power sector peer group reveals interesting dynamics. Trading at a price-to-earnings ratio of 17.36 times, the stock commands a premium to NTPC's 13.70x multiple but trades at a significant discount to generation-focused peers like Tata Power (31.59x) and renewable energy companies like Adani Green (79.76x). The company's price-to-book ratio of 2.89x sits in the middle of the pack, higher than NTPC's 1.77x but below Adani Power's 5.36x.

Power Grid's superior return on equity of 18.07% justifies some valuation premium compared to peers, as it demonstrates better capital efficiency than NTPC (12.39%), Tata Power (9.49%), and Adani Green (11.49%). However, Adani Power's exceptional ROE of 27.53% highlights that generation assets can potentially deliver higher returns, though with greater volatility. Power Grid's dividend yield of 3.09% stands out as the highest among major peers, reflecting its stable cash generation and shareholder-friendly payout policy with a dividend payout ratio of 67.19%.

The company's debt-to-equity ratio of 1.31 aligns closely with NTPC's 1.30 and remains lower than Tata Power's 1.39, indicating comparable leverage levels among transmission and integrated utilities. This moderate leverage, combined with regulated revenue streams, provides some downside protection, though it also limits the upside potential compared to pure-play generation or renewable energy companies.

Valuation Analysis: Premium Pricing Not Justified by Current Fundamentals

Power Grid Corporation's current valuation appears stretched relative to its fundamental performance and growth trajectory. Trading at ₹288.00, the stock commands a P/E ratio of 17.36 times trailing twelve-month earnings, representing a premium to the broader power sector median. The company's price-to-book ratio of 2.89x suggests the market is pricing in expectations of sustained high returns on equity, though recent margin compression raises questions about the sustainability of historical profitability levels.

The enterprise value-to-EBITDA multiple of 10.07x appears reasonable for a regulated infrastructure utility with stable cash flows, though it offers limited margin of safety given the company's anaemic growth profile. With five-year sales growth of just 3.88% and EBIT growth of 3.96%, Power Grid's expansion has barely kept pace with inflation, raising concerns about whether current valuations adequately reflect the low-growth reality.

The stock's classification as "Very Expensive" by proprietary valuation models, unchanged since October 2023, suggests persistent overvaluation concerns. Trading 16.58% below its 52-week high of ₹345.25 but still 16.36% above its 52-week low of ₹247.50, the stock occupies an uncomfortable middle ground—too expensive to be attractive but not cheap enough to warrant immediate exit for long-term holders.

Shareholding Pattern: Institutional Confidence Waning

The shareholding pattern reveals subtle but noteworthy shifts in institutional confidence. Foreign institutional investors reduced their stake by 84 basis points sequentially to 25.67% in Q2 FY26 from 26.51% in Q1 FY26, continuing a trend of gradual divestment that has seen FII holdings decline from 28.26% in Sep'24 to current levels. This 259 basis point reduction over four quarters suggests waning foreign investor appetite, potentially reflecting concerns about growth prospects and valuation.

Conversely, domestic institutional investors have marginally increased their exposure. Mutual funds raised their stake by 54 basis points to 13.35%, whilst insurance companies increased holdings by 25 basis points to 4.12%. These modest increases suggest domestic institutions view the stock's dividend yield and defensive characteristics favourably, though the quantum of additions remains relatively small and insufficient to offset foreign selling pressure.

The Government of India's unwavering 51.34% promoter holding provides strategic stability and ensures continued policy support for the company's infrastructure expansion plans. However, with total institutional holdings at 45.06%, any significant shift in institutional sentiment could materially impact stock price performance, particularly given the relatively modest free float and limited retail participation at 3.60%.

Stock Performance: Significant Underperformance Across Timeframes

Power Grid's stock performance presents a tale of two distinct periods. Over longer timeframes of two to three years, the stock delivered strong absolute returns of 40.93% and 68.38% respectively, significantly outperforming the Sensex with positive alpha of 10.46% and 30.34%. This historical outperformance reflects the period when infrastructure stocks enjoyed strong investor interest and the company's stable dividend profile attracted income-focused investors.

However, the narrative has reversed dramatically over the past year. The stock has declined 10.53% over twelve months whilst the Sensex gained 5.34%, resulting in negative alpha of 15.87%. This underperformance has accelerated in recent months, with the stock down 6.68% year-to-date against the Sensex's 7.47% gain, widening the performance gap to 14.15 percentage points. The six-month negative alpha of 9.60% and three-month negative alpha of 5.29% indicate deteriorating relative performance that shows no signs of reversal.

The stock's current technical trend is classified as "Mildly Bearish," having oscillated between bearish and mildly bearish states since late September 2025. Trading below all key moving averages—5-day (₹290.39), 20-day (₹289.05), 50-day (₹286.21), 100-day (₹289.26), and 200-day (₹288.72)—the stock lacks technical support and faces resistance at multiple levels. The risk-adjusted return of -0.45 over the past year, combined with volatility of 23.22%, classifies Power Grid as a "Medium Risk Low Return" investment, an unfavourable combination for most investors.

Investment Thesis: Deteriorating Fundamentals Outweigh Defensive Appeal

Power Grid Corporation's investment proposition has weakened considerably over the past year as operational challenges have mounted. The company's proprietary Mojo Score of 27 out of 100, firmly in "Strong Sell" territory, reflects the confluence of negative factors: bearish technical trends, deteriorating financial performance, expensive valuation, and weak growth prospects. The score declined from 41 (Sell) at the end of December 2024, indicating accelerating fundamental deterioration.

The Mojo 4 Dots Analysis framework highlights the challenges across all key parameters. Near-term drivers are decidedly negative, with quarterly financial trends showing persistent margin compression and technical indicators remaining bearish. Quality assessment, whilst rated "Average," reflects the company's modest 3.88% five-year sales growth and 3.96% EBIT growth—barely ahead of inflation and insufficient to justify premium valuations. The company's average ROCE of 12.16%, whilst positive, appears weak for a regulated utility with predictable cash flows.

Valuation remains the most concerning aspect, with the stock classified as "Very Expensive" since October 2023. Trading at 17.36 times trailing earnings and 2.89 times book value, Power Grid commands premium multiples despite delivering sub-par growth and facing margin pressures. The EV/EBITDA of 10.07x offers limited margin of safety, particularly given the company's high leverage (debt-to-EBITDA of 3.48x) and interest coverage of just 2.95 times.

Outlook: Limited Catalysts for Near-Term Recovery

The forward outlook for Power Grid Corporation remains challenging with limited visible catalysts for near-term performance improvement. The company operates in a regulated environment where tariff revisions follow predetermined formulae, limiting management's ability to swiftly address margin pressures through pricing actions. With operating margins at seven-quarter lows and interest costs elevated, a meaningful recovery in profitability appears unlikely in the immediate quarters ahead.

Key monitoring points for existing investors include quarterly margin trends, interest cost trajectory, and institutional shareholding patterns. Any further compression in operating margins below the current 79.42% level would signal deepening structural challenges. Similarly, continued reduction in FII holdings would indicate sustained institutional pessimism. On the positive side, stabilisation of margins and moderation in interest expenses could provide some relief, though such improvements appear unlikely in the near term given current macro conditions.