Is Power Grid Corporation a good addition to your portfolio?

Investors looking to benefit from India’s continuing increase in per- capita power consumption can tap Power Grid Corporation of India. High dividend yield, a steady cash flow, a healthy pipeline of projects and the experience to execute large projects make Power Grid a good long-term bet.

The stock is also attractively priced, trading at eight times its 12-month trailing earnings, a discount to peer Adani Transmission that trades at 64 times its 12-month trailing earnings.

Healthy pipeline

Before 2012, PowerGrid’s inter-State power transmission projects used to have a fixed regulated tariff mechanism(RTM).

Essentially, PowerGrid earned a fixed return on equity on the projects that it executed.

In the past few years, inter-State power transmission projects have been bid out through the TBCB (tender-based competitive bidding) route, under which a project is awarded through a reverse-auction method.

Over the past year or so, PowerGrid has managed to bag seven out of 13 projects through the TBCB route. This added around ₹6,500 crore to Power Grid’s pipeline of projects. It has also bagged a project in Bihar for an intra-State transmission project and two projects in Uttar Pradesh in December 2019.

Also, there are at least 66 GW of renewable energy transmission projects that will be bid out in the next two years. PowerGrid plans to bid aggressively for them. These projects are expected to be worth around ₹33,000 crore.

Bagging a large chunk of these projects would add to Power Grid’s steady free cash flows.

Steady cash flows

According to the company, the average return on equity from TBCB projects is trending above those under RTM.

Additionally, the company also plans to raise up to ₹10,000 crore through an InvIT (Infrastructure Investment Trust) by carving out its TBCB projects. While the company expects this to happen by March 31, 2020, it may take longer than that for many of the projects to be hived off into an InvIT. But when this happens, the company will be able to unlock the capital stuck in existing projects, which can be used for investment in future projects and increasing dividend payout.

Financials

In the quarter ended September 31, 2019, Power Grid reported a 9.5 per cent rise in consolidated net profit at ₹2,527 crore. The revenue during the quarter rose around 6 per cent to ₹9,051.29 crore.

The company has capitalised projects (revenue-generating ones) worth around ₹8,300 crore as of September 2019; it is confident of scaling this up to ₹20,000 crore by March 31, 2020.

Projects under implementation (that will start earning revenue in the future) is around ₹40,000 crore as on September 30, 2019, which shows that the company has good revenue growth visibility.

Projects yet to be implemented is around ₹66,000 crore. The company has won projects worth ₹10,000 crore so far this fiscal.

Risks

Aside from risks of delays in awarding projects, a key dampener for the stock has been the Supreme Court’s judgement pertaining to the telecom industry. The ruling held that all telecom licencees have to pay licence fees to the government based on their total revenue.

This has inadvertently impacted companies like Power Grid which have telecom licences.

Though telecom services barely make up 2 per cent of PowerGrid’s revenues, the uncertainty over the issue continues to weigh on the stock. Also, further deterioration in the finances of State distribution companies (discoms) can hurt Power Grid.

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