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Not many stocks seem attractively priced in the current market conditions. There are some exceptions though; one such stock is that of power transmission major Power Grid Corporation of India.
Compared with peers Adani Transmission (35 times) or Kalpataru Power Transmission (11.2 times), PowerGrid currently trades at eight times its 12-month trailing earnings. The stock’s valuation is also below its three-year average earnings (11 times).
Besides, PowerGrid has a good dividend yield of about 6 per cent. Investors with a three- to four-year perspective and seeking a stock at reasonable valuations with good growth and dividend prospects can invest in PowerGrid. The company is the dominant player in inter-State power transmission, a segment expected to see good growth on the back of increase in power demand in the country. An assured return model for a chunk of its business offer revenue visibility.
It has the balance-sheet strength to fund expansion and withstand competition in new projects.
Structures such as InvITs (Infrastructure Investment Trusts) for a part of its business should also help.
Dominant player
PowerGrid, a Central transmission undertaking, has a lion’s share (about 85 per cent) in the inter-State power transmission market. .
A majority (about 90 per cent) of the company’s transmission revenue comes from cost-plus projects where it was nominated to undertake inter-State power transmission. These projects give PowerGrid long-term revenue visibility. Also, with more capitalisation expected in the coming years, there should be revenue growth from such projects.
The new inter-State power transmission projects are being bid out on a competitive basis. Currently, 4 per cent of PowerGrid’s transmission revenues come from these TBCB (tender-based competitive bidding) projects.
PowerGrid has been able to do well in the competitive environment, too, bagging three of the seven projects that were bid out.
Its experience in managing regional and national power grids hold it in good stead, along with the availability of funds at competitive rates, thanks to its domestic AAA credit rating.
Other business activities include consultancy and renting out space for telecom towers near its transmission tower sites; these account for less than 10 per cent revenue.
Good growth
From FY2016-17 to FY2019-20, PowerGrid’s revenue grew at a compound annual growth rate (CAGR) of about 12 per cent to ₹36,186 crore, while its net profit grew at a CAGR of about 13 per cent to ₹10,811 crore.
The company’s dividend payout has steadily increased in the last four financial years, at around 44 per cent in 2019-20.
Considering that the Centre relies on dividends from PSUs to meet its non-revenue receipt targets, the dividend payout will continue to remain high. Add to this, the expected inflow of about ₹7,000 crore by hiving off its TBCB projects into an InvIT, the dividend yield for shareholders can rise in the future.
Also read: Power Grid: High on power
Covid impact
WhilePowerGrid also took a hit in the recent June quarter due to lockdowns, the impact was not as acute as it was on power producers. In the June quarter, the company reported a consolidated net profit of ₹2,048 crore (down 18 per cent year-on-year) on revenues of ₹9,458 crore (up 3 per cent y-o-y).
The profit during the quarter took a hit due a one-time rebate given to State discoms under the Centre’s ₹90,000-crore liquidity scheme for discoms.
As of June 2020, Power Grid’s unpaid receivables over 45 days from State power distribution companies rose to ₹6,145 crore from ₹2,033 crore as of March 2020.
This then came down to ₹5,157 crore as of July 2020. The disbursements under the liquidity scheme have helped reduce the pending receivables to an extent.
The company says the receivables should come down to reasonable levels in 3-4 quarters.
Capital expenditure
There were delays in completing projects due to non-availability of labour and supplies, and PowerGrid’s capital expenditure during the June 2020 quarter was ₹1,906 crore, lower than in the year-ago period.
At the end of July 2020, the capex was ₹2,750 crore (provisional amount) fiscal year-to-date.
Projects under implementation that started commercial operations (project capitalisation) were to the tune of ₹1,184 crore in the June 2020 quarter.
PowerGrid started commercial operations at its delayed Raigarh-Pugalur project in September 2020; this is expected to add around ₹10,000-15,000 crore to project capitalisation and help meet the company’s ₹20,000-25,000-crore capitalisation target in FY2021.
Outlook
While there were delays in bids last year or so, the Centre expects investments of nearly ₹ 1.9-lakh crore in transmission projects over the next 4-5 years.
About ₹60,000-65,000 crore of this is expected to come from renewable energy transmission corridors that will be bid out to evacuate power from States with high renewable energy production; this will need sophisticated transmission lines.
This should presents a good opportunity for PowerGrid to increase its projects.
These include ongoing projects of about ₹33,000 crore, new projects of about ₹6,000 crore, and TBCB projects of about ₹12,000 crore.
There are also many States that are planning to bid out intra-State transmission projects.
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