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The stock of Power Grid Corporation of India (PowerGrid), the country’s principal power transmission utility, has gained 41 per cent since the March lows.
Despite the rise, at ₹203, the PowerGrid stock trades at 1.6 times its consolidated book value as of September 2020, just under its three -year historical average price-to-book value of 1.7 times.
PowerGrid enjoys a near monopoly on the country’s inter-state and inter-regional power transmission network and earns an assured return, as determined by the Central Electricity Regulatory Commission (CERC), on its commissioned projects. This ensures revenue certainty for the company.
Expansion in the country’s power transmission infrastructure in the coming years will be driven mainly by renewable energy.. While projects are to be largely assigned based on tariff-based competitive bidding (and not the regulated return model), PowerGrid, a dominant player in the transmission sector, is well-positioned to bag many of them.
Investors with a long-term horizon can buy the stock of PowerGrid, a safe bet in the Indian power sector.
PowerGrid operates under an assured return model wherein tariffs set by the electricity regulator allow the company a pass-through of costs and a 15.5 per cent pre-tax return on equity on completed projects. The company’s revenue, therefore, depends on project completion and commissioning.
Of its planned capital expenditure (capex) of ₹10,500 crore for FY21, PowerGrid hadincurred nearly half of it by the six-month period ended September 2020. The company plans to spend a similar amount on capex in the next few years too.
More significantly, with project capitalisation (projects commencing commercial operation) expected to be ₹20,000 -25,000 crore in the current fiscal, the company’s revenue should get a boost going forward. By September-end 2020, project capitalisation totaling around ₹11,900 crore.
A chunk of these projects became commercially operational only in the September 2020 quarter, the revenue impact of which should flow in the coming quarters.
Growth in capacity
To meet its ambitious renewable energy target, the government has identified 66 GW (gigawatts) of renewable energy zones across seven States with high renewable energy (solar and wind power) potential. Apart from this, there are also opportunities in intra-state transmission projects, estimated to entail an investment of ₹1.9 lakh crore between FY20 and FY25.
This should enable PowerGrid to have a healthy project pipeline. According to the company, it had upcoming power transmission (both inter- and intra-state) projects worth ₹17,900 crore as of September 2020.
That apart, while many transmission projects have been competitively bid out since 2011, given PowerGrid’s historically dominant position, such projects still account for only 5 per cent of the company’s transmission revenue. The other projects are regulated tariff-based.
Power transmission contributed 96 per cent of the company’s consolidated revenue in FY20.
Financial performance
Between FY15 and FY20, PowerGrid grew its revenue at 16.4 per cent (CAGR) to ₹37,744 crore and net profit at 17 per cent (CAGR) to ₹11,059 crore. The company’s steady capital expenditure (annually ₹22,000-25,000 crore) and healthy pace of project commissioning during FY15 and FY19 (though, lower in FY20) helped.
Impacted largely by the one-time rebate of ₹ 1,075 crore to the cash-strapped power distribution utilities in the June 2020 quarter, PowerGrid posted a tepid 3 per cent increase in revenue and 18 per cent decline in net profit. Apart from that, the Covid-induced lockdown also adversely impacted the pace of the company’s project construction work. With the situation improving, PowerGrid posted better numbers in the September 2020 quarter – revenue and net profit grew 5.3 per cent and 20.3 per cent, year-on-year.
Between, FY17 and FY20, the company declared dividend of ₹4.35 – 10 per share. At ₹10 dividend per share, the dividend yield comes to an attractive 4.9 per cent for FY20.
PowerGrid will also be monetising its tariff-based competitive projects by way of an InvIT (infrastructure investment trust). In the first block, PowerGrid will monetise five such assets worth ₹7,164 crore. The proceeds raised will be utilised for new projects, and possibly dividends, in case of surplus.
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