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About 50 per cent of electricity generated in India is transmitted by Power Grid, the state-owned electricity transmission utility. The company had outlined an ambitious expansion plan for the 12th Five Year Plan (FY13-17), under which it seeks to increase its transmission and distribution network even further.
The company has increased its capex plan from Rs 1,00,000 crore to Rs 1,10,000 crore. Analysts claim the company has also identified 27 transmission projects that it intends to complete this year. The company has already raised Rs 5,400 crore for the additional capital expenditure it is expected to incur.
Analysts are betting on an improvement in the company’s earnings on expectation of better asset commissioning over the next few years. Also, most of the planned investments have already been ordered, which suggests that the company’s capex plans are unlikely to change. According to Barclays, currently 60 per cent of its capital work in progress is installed, which should lead to rapid commissioning. The brokerage adds that investments in renewable energy integration and smart grid technology installations should further add to capex of PowerGrid.
With the Central Electricity Regulatory Commission (CERC) disallowing income from short-term open access in November 2013, RoEs of Power Grid took a hit of 1.5 per cent. Antique Stock Broking says, “We believe the book RoE for the company will increase from 13 per cent in FY14 to 14 per cent in FY16 due to a flat yearly capex at Rs 20,000 crore and higher capitalisation in the years to come.”
IIFL believes that if income from short term open access is restored and project completion improves, then Power Grid’s core RoE could improve 1-2 per cent. The stock trades at a FY16 price/earnings multiple of 12.1x and price/book of 1.6x. While some brokerages have upgraded FY15 earnings, analysts believe there is room for further upside.
