Invest in Power Grid as a play on steady earnings, asset monetisation

Attractive dividend pay-out and low valuations are other positives

Transmission major Power Grid (PGCIL) reported encouraging Q1FY22 results coupled to a strategy of asset monetisation. Consolidated revenues were at Rs 10,392 crore, which is 6 per cent YoY growth over Rs 9,817 crore in Q1FY21 and a fall of 4 per cent QoQ versus revenues of Rs 10,816 crore in Q4FY21.

PAT grew 193 per cent YoY to Rs 5,998 crore, versus Rs 2,048 crore (without exceptional items) and up 70 per cent QoQ versus Rs 3,526 crore. Reported PAT was at Rs 3,341 crore (including extraordinary items) versus Rs 2,935 crore.

Ebitda was at Rs 9,228 crore, a rise of 5 per cent over Rs 8,787 crore YoY and a drop of 3 per cent QoQ versus Rs 9,495 crore. Debt outstanding has declined about Rs 5,000 crore to Rs 1.4 trillion. However, financing costs rose to Rs 2,215 crore versus Rs 1,881 crore (QoQ). Receivables have declined to Rs 7,619 crore from Rs 8,580 crore YoY while being up substantially from Rs 3,600 crore (QoQ). PGCIL has ongoing work-in-hand of Rs 35,100 crore with a FY22 Capex plan of Rs 7,500 crore.

While the bulk of revenues (Rs 9,991 crore in Q1FY22) comes from the transmission business, the company also has a presence in telecom, which contributed Rs 97 crore to the topline and in consultancy (Rs 129 crore).

It has started hiving off assets into the investment trust PGInvIT, which is available on the BSE. It intends to gradually transfer most, if not all of its SPVs (Special Purpose Vehicles), to the trust. This would include 22 TBCB projects (tariff-based competitive bid) to the InvIT – these are 100 per cent subsidiaries.

It has already transferred 74 per cent equity in five operational projects. The InvIT launch raised around Rs 4,993 crore in fresh issuances alongside an offer for sale of Rs 2,742 crore worth of units. The profit on sale of the above Investments (net of related expenses) is Rs 3,014 crore, which is disclosed under exceptional item.

In lieu of the shareholding transferred, 410.65 million units were allotted by PGlnvlT to the company. The company has retained 136.50 million units – this 15 per cent of the total units of PGlnvlT outstanding on post-issue basis. The other 274.15 million units were sold in the 'Offer for Sale' mentioned above.

PGCIL is also increasing its investment in Energy Efficiency Services Limited (EESL), a joint venture company of Power Grid, NTPC, PFC and REC. The board has cleared fresh equity infusion of upto Rs 425 crore.

PGCIL could find opportunities in distribution reform schemes. It estimates an incremental Rs 2 trillion of investment in discoms, which are upgrading distribution networks and introducing smart metering, etc. It will engage with discoms to provide technical solutions and investment support. It is also guiding for Rs 10,800 crore of opportunities in state-level transmission schemes, with total investments of around Rs 40,000 crore.

If there’s delays in such schemes, the company could distribute the cash received from the InvIT as dividends. Some analysts see a potential dividend yield of 7-8 per cent backed by the asset monetisation. This is in addition to steady but not spectacular earnings growth. The stock has traded in the band of Rs 175-185 in the last 20 sessions and it has relatively low valuations.