Power Grid Corp: Earnings beat; massive ramp up ahead

12 Feb 2024 , 12:33 PM

Analysts of IIFL Capital Services upgrade Powergrid (PWGR) FY25-26 consolidated EPS by 3- 5%, as capex/capitalisation target is upped; growth visibility >FY26 has improved, as Govt anticipates Rs3.1tn capex on ISTS projects; thermal IPPs will trigger additional capex. Rooftop solar opportunity is significant. The 11% YoY growth in Q3 was led by Rs18bn capitalisation and PY income. Maintain a positive stance; however, one can time the stock better for a meaningful upside. 

Consol. PAT up 11% YoY: 

PWGR’s Q3FY24 PAT was up 11% YoY on the back of Rs18bn project capitalisation (Rs10bn RTM), and Rs2.4bn income pertaining to earlier periods; during the quarter, it spent Rs33.4bn towards new projects including Rs15bn towards RTM projects. While treasury income was flat YoY, PWGR’s interest outgo was down 19% YoY (FX loss recorded in Q3FY23), while depreciation was largely unchanged. It has demerged its telecom business into a 100% subsidiary, where Ebit fell 27% YoY, and consultancy profits were also down 89% YoY; however, their contribution to overall Ebit is only ~1%, and to that extent, growth was driven by its core transmission business. 

Improving growth visibility: 

R K Tyagi, PWGR’s new CMD, during the analyst meet shared that -1) company sees an opportunity to invest Rs2.08tn until FY32, to evacuate RE projects; this has upside, if National Electricity Plan (NEP) is approved (Rs3.1tn capex in inter-state lines), and construction works on 88GW of thermal plants near completion; 2) Govt is encouraging completion of transmission lines ahead of generation projects to ensure timely evacuation; 3) over next 12 months, Rs880bn projects are likely to be awarded, where PWGR has an advantage over competition and targets to earn 12-14% IRR; 4) competitive intensity remains firm; key challenge is tightness in vendor base, particularly high voltage segment; it is working on vendor development and bulk procurement; regardless issues may persist; 5) draft CERC regulations are by and large neutral. 

Upgrade forecasts:

Analysts of IIFL Capital Services upgrade PWGR’s FY25/26 consolidated EPS by 3- 5%, to reflect 20%/10% higher capex/ capitalisation. PWGR’s base case asset growth of 7% p.a. through FY32 has upside as NEP is finalised, and new thermal IPPs are planned. By virtue of its defensive revenue model, PWGR offers a low risk annuity play on the power sector; sharp run up in stock limits near term upside; improving growth visibility however may warrant to add the stock on dips. Analysts of IIFL Capital Services maintain a positive stance.