Power Grid Corp: Netting a Powerful Grid

10 Nov 2023 , 10:30 AM

Power Grid (PWGR) expects Rs1.8-2tn investment opportunity in the base case, through FY32; material acceleration in projects is seen >FY26; until then the target is to complete Rs100-190bn projects pa, which should lead to a steady 5-6% pa standalone/ consol earnings growth. Valuations are reasonable. BUY. 

Upbeat on growth:

PWGR during the analyst meet stated that -1) National Committee on Transmission will shortly award Rs600bn projects, and follow up with balance Rs1.1tn over the next 3-4 years (evacuation of RE projects); pick up in thermal project awards would necessitate further investments in transmission systems; 2) on conservative estimates it sees an opportunity to invest Rs1.8-2tn over FY32 including international projects; 3) work on data centres is yet to start, while orders for smart meters are placed; 4) FY24/25ii capex target is Rs100bn/150bn; capitalisation is seen at ~Rs100/170bn; 5) transfer of assets to INVIT is not anticipated (change in guidelines). 

Earnings acceleration seen >FY26: 

Through FY24-26, analysts of IIFL Capital Services forecast PWGR to register 5%/6% pa standalone/consol PAT growth, on the back of Rs90-190bn pa project completion and an unchanged regulatory framework. PWGR expects CERC to publish draft regulations sometime in December-23. The earnings will likely see pickup post FY26, as the investments/capitalisation towards RE projects commercialise. In the base case analysts of IIFL Capital Services think, PWGR is well placed to complete Rs200-250bn projects >FY26, which compares favourably with ~Rs180bn average seen through FY17-23; the share of TBCB projects in overall balance sheet should rise progressively thereby diluting regulatory risk. 

Reasonable valuations: 

PWGR should sustain its return ratios above industry average through FY26; the cash flows should be strong at Rs380-390bn p.a., well ahead of its proposed capex; as such D/E is comfortable at 1.3x and to that extent the stock valuations are not demanding at 12x FY25 P/E and ~2x FY25 BV; material improvement in payout ratio is not anticipated (already at 67%), given the growth opportunity. That said, analysts of IIFL Capital Services see the stock awaiting clarity on the upcoming regulations, for further re-rating. Maintain BUY.