Power Grid Corporation: Massive revival on cards

23 May 2023 , 11:15 AM

Recommendation: Buy

Target Price: Rs. 260

Meanwhile, it plans to award Rs. 310 billion projects shortly, carve out Telecom/Consulting businesses (<5% EBIT); and prefers securitization over INVIT (non-remunerative). The ~6% yield offers fundamental support to stock, which can materially re-rate as growth visibility improves. 

Improving sectoral fundamentals

Power sector fundamentals are improving with pickup in demand, on back of economic activity; CEA estimates ~Rs. 2 trillion investments in inter-state transmission systems by FY30 to evacuate power from new IPPs (RE and others). Success of green H2 would need further investments. States could invest similar amount, albeit with a delay, given their weak financials. However, even this could change if MoP were to persist with carrot and stick approach (worked well in FY23). There is massive opportunity in battery back-up, smart metering, etc. 

Set to finalize large orders

PWGR plans to award ~Rs. 310 billion projects soon. The momentum should improve with finalization of the new transmission lines; although competitive intensity should lower, a conservative 50% win ratio can add ~Rs. 900 billion to its ~Rs. 500 billion project pipeline. However, EPC chain is tight, and poses cost and time overrun risks. Meanwhile, PWGR is set to carve out Telecom and Consulting (solar, data center, smart metering, etc.) into 2 subsidiaries to pursue aggressive growth opportunities. However, it may opt for securitization over INVIT route for asset monetization, on the back of new guidelines proposed by the government.

Earnings growth set to pick up >FY25

While O&M norms may be tightened, risk of dilution in 15.5% RoE >FY25 remains low. In FY24, PWGR is aiming capex/ capitalization of Rs. 88 billion/ Rs. 110 billion (versus Rs. 74 billion/Rs. 92 billion FY23). Pace of capex and capitalization will pick up >FY25 as new lines are awarded and executed. But earnings growth through FY25 will be sluggish, and can improve if PWGR scales up the non-Transmission businesses. Meanwhile, ~6% dividend yield offers fundamental support to the stock, which can re-rate with new project win.