Power Grid Corp: Revival in investment cycle

2 Aug 2023 , 10:46 AM

Recommendation: Buy; target price: Rs 270

 

PWGR reported a 6% decline in standalone/consolidated PAT, on the back of lower income from prior-period tariff true-ups. As such, PWGR will invest Rs1.8trn through FY24-32 in new transmission projects and smart metering business (~15% IRRs), which will meaningfully contribute to earnings growth >FY25. At CMP, ~6% dividend yield offers fundamental support to the stock and can rerate further on new project wins. BUY 

Good operating performance: 

PWGR’s Q1FY24 standalone PAT fell 6% YoY to Rs35.4bn (7% below IIFLe) due to fall in income pertaining to prior period tariff adjustments (Rs2.8bn vs Rs4.9bn YoY); excluding which PAT was flat YoY. As such, the operating performance was good, as grid availability was above normative levels at 99.86% vs 99.79% YoY. PWGR commissioned Rs6.5bn worth of projects and incurred capex of Rs9.4bn in Q1FY24 vs Rs13.3bn and Rs7.6bn YoY, respectively on a standalone basis. On a similar footing, consolidated PAT was also down 6% YoY; capex/ capitalisation was Rs15.1bn/Rs16.2bn vs Rs14.8bn/Rs13.5bn YoY. 

Massive capex on cards: 

During the analyst meet, PWGR CMD stated: 1) PWGR aims to invest Rs1.7trn through FY24-32 in new transmission projects, given the need to evacuate new RE capacity being awarded (annual capex >FY26 to be Rs200-250bn). 2) Current projects-in-hand are ~Rs487bn (RTM- Rs359bn, TBCB- Rs128bn). 3) CERC’s staff paper on tariff regulations has a grand-fathering clause such that if there was a cut in regulated RoE (less likely), it would only apply to projects commissioned post FY24; and to that extent, the existing projects would not be affected. 4) PWGR will invest Rs100bn over the next 5 years, pursuing the smart meter opportunity under the rental model, where it targets to earn ~15% IRR. 5) Rise in debtors > 45 days is due to a dispute on sharing of transmission charges by Tamil Nadu SEB and awaits regulatory closure. 

Growth to pick up post >FY25: 

The pace of capex/ capitalisation is picking up, with management increasing FY24 capex plans to >Rs100bn vs Rs88bn earlier as new lines are being awarded. Through FY25, earnings growth will be sluggish and will pick up > FY25 as these projects get commissioned. The likelihood of adverse regulations remains low, given the need to attract investment in the sector. Meanwhile, ~6% dividend yield offers fundamental support to the stock and can re-rate as more projects are awarded. BUY