Valuations factor in multiple positives for Power Grid Corporation

Brokerages are positive given growth prospects, falling debt levels and high dividends

Power consumption is strongly correlated with economic growth and the power sector is likely to see steady expansion. Demand in 2021-22 had surpassed its pre-Covid-19 level in 2019-20 and this year is setting new records.

The Central Electricity Authority’s (CEA) Draft National Electricity Plan (NEP) projects over 466 gigawatt (GW) of net capacity addition in the next decade. While thermal coal will remain the major contributor, renewables (which are at 15-16 per cent contribution to generation in 2022-23) will play an increasing role. There are concerns over huge dues of Rs 1.37 trillion owed by distribution companies and there are also concerns about depletion of thermal coal inventories, leading to expensive imports.  

One monopoly which will play a role in this expansion is Power Grid Corporation of India (PGCIL). The PSU transmission giant is expected to see growth in line with expansion in generation capacity. It also has interests worth mentioning in telecom and consultancy (with aggregated revenues of around Rs 340 crore in the first quarter of the 2022-23 financial year or Q1FY23) and it is monetising assets via the infrastructure investment (InvIT) route.

Power Grid’s Q1FY23 results are stable on consolidated basis. Revenues grew 6.7 per cent YoY to Rs 10,900 crore, while the operating profit was up 2.8 per cent to Rs 9,250 crore and the reported net profit was at Rs 3,800 crore. The profit after tax (PAT) adjusted for extraordinary items at Rs 3,500 crore was up 6.8 per cent year-on-year (YoY). For FY23, the capex and commissioning targets are Rs 8,000 crore and Rs 11,000 crore respectively.

The total estimated investment in transmission between 2022-23 to 2026-27 is Rs 1.24 trillion, of which Rs 46,800 crore of capex is planned over this fiscal and the next. In addition, PGCIL is looking at opportunities in smart metering and distribution infrastructure, solar power and battery storage, data centres among others. The InvIT has helped to retire debt taken on projects, and it has resulted in a net cash inflow of Rs 2,700 crore. PGCIL expects to monetise Rs 6,600 crore worth of TBCB (tariff based competitive bidding) projects in the second half of this fiscal.

PGCIL has signed an agreement with Reliance Industries (RIL) to build a dedicated transmission line from Jam Khambaliya to RIL’s Jamnagar facilities at a project cost of Rs 250 crore. The line will be owned by PGCIL and tariff recovered from RIL. PGCIL has also signed a memorandum of understanding with Gujarat discoms (MGVCL and UGVCL) for the installation of 66 lakh smart meters. This project is based on the DBFOOT model, where PGCIL will receive monthly rentals. The outstanding receivables were at Rs 5,860 crore in Q1FY23 vs Rs 7,080 crore YoY. Of this, Rs 2,000 crore is dues from six discoms settled for payment through instalments, under the new late payment surcharge rules. The guidance is for receivables to decline to less than 45 days by 2022-23 end.

The company has assured growth and it pays high dividends. The InvIT helps it to monetise assets quickly, ensuring debt levels stay manageable. PGCIL also has a very high operating profit (over 90 per cent) and a high net margin (32 per cent). Most of its expenditures are treated as capex, which is amortised and depreciated rather than being treated as expense. It is going to run into increasing competition, which means lower internal rate of return on future projects. Most analysts have buy recommendations but the discounted cash flow valuations in the range of Rs 240-250 implies PGCIL is almost fully-valued at current prices.