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The stock of public sector energy utilities major Power Grid Corporation of India (Power Grid) has been trading in a range for the past three years. The stock has been a solid defensive, given that it doesn’t correct steeply during falls, thanks to the steady revenue visibility that it gets by virtue of having a sound order book. The Centre’s focus on electricity for all with all-day availability has helped it bag a fair share of power projects in the past. It also has a healthy pipeline to look forward to.
Being a solid dividend payer, investors with a two-three-year horizon would find it an ideal bet, especially given the political and macro events over the next few quarters.
As with several central PSUs (public sector undertakings), Power Grid too trades at reasonable or attractive price-earnings multiples of around 12.6 times its nine-month FY19 annualised earnings . At the current valuation multiples, the company’s share price is cheaper when compared to Adani Transmission’s PE ratio (around 38 times its nine-month FY19 annualised earnings).
Apart from attractive valuation, considering the large pipeline of projects and its ability to execute large projects regularly, Power Grid is a good bet for investors. The company’s dividend yield has improved over the past three financial years to 2.71 per cent in FY18. The total capital work-in-progress, or projects under execution, stood at ₹40,262 crore and gives it good visibility for the next two years.
Steady revenue visibility
The Centre’s 24/7 power-for-all scheme has meant that Power Grid received a large number of projects for execution. As the targets get achieved across the country, the company may have fewer new projects in the space. But the existing work-in-hand (projects awarded) gives a visibility of at least ₹20,000 crore worth of contracts to be executed over the next two years.
One aspect to note is that the guaranteed after-tax return-on-equity on projects (of 15.5 per cent) in the new tariff policy will not apply to future projects. This is also because most of the new projects the company expects to take up will come through tariff-based competitive bidding (TBCB) processes.
Around ₹15,700 crore worth of TBCB projects are expected to be awarded within the next one year and Power Grid expects to bag a significant share. These projects have to be commissioned by December 2020 and December 2021. This means that more revenue-earning projects will go onstream over the next couple of years.
There is also a larger pipeline of renewable projects (66.5 GW; 1GW = 1,000 MW) that is expected to be bid out in the next 33 months (29GW by end of 2020 and rest by end of 2021). These projects entail ₹43,000 crore of capital expenditure. Phase 1 of ₹11,500 crore has been prioritised and allotted to specific projects, with Power Grid receiving ₹2,700 crore worth of projects already. This is included in the work-in-progress.
Around ₹7,800 crore worth of projects in phase 1 have been assigned under TBCB. The time period to capitalisation or translation of work-in-progress to revenue-generating assets, will shrink to 18-21 months from the time of winning the bid, compared to 24-30 months for other transmission projects.
Healthy financials
Even though the power sector is under continuous stress, Power Grid continues to report higher transmission revenue. This is because it is guaranteed payments by the Centre and State governments though tripartite agreements. However, there have been some niggles in recoveries from certain State distribution companies in recent months, which has led to an increase in working capital.
Over three financial years till FY18, Power Grid’s net profit saw a compounded annual growth rate of 11.5 per cent to ₹8,239 crore. For the nine months ended December 31, 2018, Power Grid’s net profit rose 10.4 per cent to ₹6,881.20 crore. Revenue was up nearly 13.4 per cent to ₹24,881.30 crore.
Power Grid’s debt-to-equity ratio for the past five years has hovered around 2.4-2.49 times. The debt-service coverage ratio for the nine months of FY19 has fallen to 1.85 to 2.42 compared to a year ago as a result rising interest costs in FY19.
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