Why Power Grid stock is a safe bet

Investors with a long-term investment horizon can consider buying the stock of Power Grid Corporation of India (Power Grid), the country’s principal power transmission company. The stock has gained 35 per cent (adjusted for bonus issue) since our ‘buy’ call in mid-January 2021 and provides scope for further upside.

At the current market price of ₹203, the Power Grid stock trades at a forward price-to-book value (P/B) of 1.7 times, just above its 3-year average P/B of 1.5 times. The stock discounts the FY23 estimated earnings by 9.6 times, which is only slightly higher than its 3-year average P/E of 8.6 times (all multiples based on Bloomberg consensus estimates). The stock is reasonably valued given that Power Grid has many factors in its favour making it a relatively safe bet in the power sector.

About business

The company holds near monopoly on the country’s inter-state and inter-regional power transmission network. Regulated tariffs as set by the Central Electricity Regulatory Commission (CERC) ensure complete pass through of costs plus an assured return on its completed projects. This offers revenue visibility to the company’s operations.

While the pace of project completion, the key revenue driver for the company, has eased a bit compared to a few years ago, this is expected to gather pace.

The government’s target of ramping up India’s renewable power generation capacity from the existing over 100 GW to 500 GW by 2030, though ambitious will have to be backed by upgradation and expansion of the country’s existing power transmission infrastructure.

Despite the competition from private sector transmission players, Power Grid with its long-established record is well placed to partake in this growth. Currently, Power Grid has ₹26,500 crore worth of projects bagged through tariff-based competitive bidding.

Power Grid’s consistent dividend payments too make it an attractive investment. At the current stock price and dividend per share of ₹9.75 in FY21, the dividend yield comes to 4.80 per cent.

Growth drivers

Power Grid earns regulated tariffs that ensure complete pass-through of costs such as operation and maintenance expenses, interest cost and depreciation plus a pre-tax ROE of 15.5 per cent on the company’s completed projects assigned to it by the government.

Project completion and commissioning, therefore, holds the key to revenue and profit growth. Apart from these, Power Grid also competes with private sector players for projects auctioned under a tariff-based competitive bidding (TBCB) process.

Power transmission accounted for 97 cent of the company’s consolidated revenue in FY21. The other business segments, telecom and consultancy contributed the residual 3 per cent.

Over the past several years, Power Grid has steadily commissioned transmission projects driving its revenue though the pace has tapered recently.

Between FY16 and FY20, yearly project completion went down from ₹31,788 crore to ₹18,234 crore. But in the Covid-hit FY21, after the initial labour and supply disruptions, the company completed projects worth ₹21,467 crore.

During the first half of FY22, transmission projects worth ₹13, 275 crore were completed, the revenue from which should start reflecting in performance in the coming quarters.

Apart from this, Power Grid plans to undertake capital expenditure (capex) of ₹7,500 crore in FY22, half of which had already been spent during the first half. While the capex is lower than that in the past, it may gather pace as the company’s plans to venture into smart metering in several states, potentially a ₹1.5 lakh crore opportunity, take shape. Power Grid is also in discussion with states such as MP, HP, Gujarat, Haryana, and Rajasthan for upgradation of their power distribution infrastructure.

Under the National Infrastructure Pipeline, capital expenditure of ₹3 lakh crore is expected to be spent on the country’s power transmission infrastructure during FY20-25. Of this, Power Grid alone is expected to execute projects worth ₹65,500 crore. This includes projects such as HVDC bipole link between western and southern regions and interstate green energy corridor transmission link.

Strong financials

Between FY16 and FY21, Power Grid grew its revenue at 14 per cent (CAGR) to ₹39,640 crore and net profit at 14.4 per cent (CAGR) to ₹11,675 crore. The company’s steady project commissioning, albeit with a dip in FY20, aided growth. This is reflected in the healthy growth of the company’s power transmission assets too. By the end of FY21, Power Grid had 1.7 lakh circuit kms of transmission lines (up 21 per cent) and 4,37,523 MVA of transformation capacity (up 57 per cent) from FY16.

For the half-year ended September 2021, Power Grid’s revenue rose 8 per cent to ₹20,483 crore and profit before tax (after excluding exceptional expenses and income) grew 10 per cent to ₹8,124 crore compared to year ago.

Power Grid has commenced monetising its TBCB projects by transferring its stake in these assets to the PowerGrid InvIt (infrastructure investment trust).

It has so far monetized assets worth ₹7,200 crore. The proceeds raised will be utilised for capex for new projects, and possibly dividends too, in case of surplus.

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