Investors with a long-term investment horizon can consider buying shares of the country’s leading power transmission company Power Grid Corporation of India (Power Grid). The stock has gained 35 per cent (adjusted for bonus issues) since our ‘buy’ call in mid-January 2021 and provides further room to grow.
At the current market price of ₹203, Power Grid stock trades at a forward price-to-book value (P/B) of 1.7x, which is just above its 3-year average P/B of 1.5x. The stock discounts FY13 estimated earnings of 9.6 times, which is only slightly more than 8.6 times its 3-year average P/E (all multiples based on Bloomberg consensus estimates). The stock has been reasonably priced considering that there are several factors in Power Grid’s favor which make it a relatively safe bet in the power sector.
about business
The company has almost a monopoly over the country’s inter-state and inter-regional power transmission network. Regulated tariffs as decided by the Central Electricity Regulatory Commission (CERC) ensure complete pass through of cost and assured returns on completed projects. It provides revenue visibility for the company’s operations.
While the pace of project completion, the key revenue driver for the company, has slowed down slightly compared to a few years ago, it is expected to pick up.
The government’s goal of increasing India’s renewable energy generation capacity from the current 100 GW to 500 GW by 2030, although ambitious will have to be supported by the upgrade and expansion of the country’s existing power transmission infrastructure.
Despite competition from private sector transmission players, Power Grid with its long-established record is well poised to participate in this growth. Presently, Power Grid has projects worth ₹26,500 crore secured through tariff-based competitive bidding.
Power Grid’s consistent dividend payout also makes it an attractive investment. At the current stock price and dividend per share of ₹9.75 in FY2011, the dividend yield comes out to 4.80 per cent.
development driver
Power Grid earns regulated tariffs that ensure complete pass-through of costs such as operation and maintenance expenses, interest cost and depreciation as well as a pre-tax ROE of 15.5 per cent by the government on the company’s completed projects.
Therefore, project completion and commissioning is the key to revenue and profit growth. Apart from these, Power Grid also competes with private sector players for projects to be auctioned under a tariff-based competitive bidding (TBCB) process.
Power transmission accounted for 97 per cent of the company’s consolidated revenue in FY11. Other business sectors, telecommunications and consulting contributed the remaining 3 per cent.
Over the past several years, Power Grid has consistently commissioned transmission projects to drive its revenue, although the pace has slowed recently.
Between FY16 and FY20, annual project completion declined from ₹31,788 crore to ₹18,234 crore. But in the Covid-hit FY21, after initial labor and supply disruptions, the company completed projects worth ₹21,467 crore.
During the first half of FY22, transmission projects worth ₹13,275 crore were completed, revenue from which should start showing performance in the coming quarters.
In addition, Power Grid plans to incur capital expenditure (capex) of Rs 7,500 crore in FY12, half of which has already been spent during the first half. While the capex is lower than before, it could pick up pace as the company’s plan to venture into smart metering in several states, potentially a ₹1.5 lakh crore opportunity, takes shape. Power Grid is also in discussions with states like MP, HP, Gujarat, Haryana and Rajasthan to upgrade its power distribution infrastructure.
Under the National Infrastructure Pipeline, the country’s power transmission infrastructure is expected to have a capital expenditure of Rs 3 lakh crore during the financial year 2020-25. Of this, Power Grid alone is expected to execute projects worth Rs 65,500 crore. This includes projects such as the HVDC bipole link and the Interstate Green Energy Corridor transmission link between the western and southern regions.
strong financial
Between FY16 and FY21, Power Grid grew its revenue by 14 per cent (CAGR) to Rs 39,640 crore and net profit by 14.4 per cent (CAGR) to Rs 11,675 crore. The company’s steady project commissioning, with a decline in fiscal year 2020, assisted growth. This is also reflected in the healthy growth of the power transmission assets of the company. By the end of FY21, Power Grid had 1.7 lakh circuit kilometers of transmission lines (up 21 per cent) and 4,37,523 MVA of transformation capacity (up 57 per cent) from FY16.
For the half-year ended September 2021, Power Grid’s revenue grew 8 per cent to ₹20,483 crore and profit before tax (excluding extraordinary expenditure and income) increased 10 per cent to ₹8,124 crore from a year ago.
Power Grid has started monetizing its TBCB projects by transferring its stake in these assets to POWERGRID INVIT (Infrastructure Investment Trust).
It has monetised assets worth ₹7,200 crore so far. The amount raised will be used for capital expenditure for new projects, and possibly dividends in case of surplus.
regulated-return business
,