Power Grid Corp stock in expensive zone despite its market dominance

Power Grid Corporation of India (PGCIL) was one of the top Sensex gainers in trade on Monday, ending with gains of nearly 9 per cent. The stock has gained about 42 per cent year-to-date.

For the March quarter, the company reported a revenue of Rs 12,000 crore, which was down 3 per cent year-on-year (Y-o-Y) but up 4 per cent quarter-on-quarter (Q-o-Q).

The drop was on account of one-time arrears related to the Nagapattinam tariff bid competitive bidding (TBCB) project in Q4 FY23.

The operating profit came in at Rs 10,100 crore, which was down 8 per cent Y-o-Y and 7 per cent Q-o-Q.

Operating profit margin of 84.3 per cent was down versus 88.4 per cent Y-o-Y and 87.2 per cent in Q3 FY24.

The adjusted net profit was Rs 4,340 crore, flat Y-o-Y and up 1 per cent Q-o-Q.  

The FY25 and FY26 capex guidance was revised upwards to at least Rs 15,000 crore (FY25) and Rs 20,000 crore for FY26.

The transmission opportunities between FY25 and up to CY2032 have capex needs of Rs 2.075 trillion (upward revision from the earlier guidance of Rs 1.905 trillion). This includes inter state transmission system (ISTS), intra-state TS, and cross-border projects worth Rs 1.36 trillion, Rs 37,000 crore, Rs 10,000 crore and international projects worth Rs 7,500 crore.

PGCIL also estimates Rs 17,000-crore outlay in other businesses such as solar generation, smart metering and data centres over the next eight years.

It has Rs 86,700 crore of projects in hand, including Rs 11,200 crore of regulated tariff mechanism projects, and Rs 75,500 crore in other projects, including TBCB (December 2023).

PGCIL had a capex of Rs 3,400 crore in Q4 FY24 and Rs 12,500 crore in FY24 with capitalisation of Rs 1,800 crore (Q4 FY24) and Rs 7,600 crore during FY24.

The management expects higher capitalisation (Rs 15,000-16,000 crore) during FY25.

The company has formed a joint venture (JV) in Rajasthan (with PGCIL at 76 per cent stake) for developing an intra-state transmission network, with a capex of Rs 10,000 crore.

It is in discussion with other states like Andhra, Assam, UP and Odisha for the same.

In FY24, PGCIL won 13 TBCB projects, with a market share of 65 per cent of such projects against guidance of 40 per cent.

The company has commissioned five substation projects leading to the addition of 19,720 MVA transformation and 4,036 circuit kilometre transmission lines during Q4 FY24.

It is doing the Green Energy Corridor (GEC) Phase-II ISTS for a 13 GW renewables project in Ladakh. It is also setting up 713 km transmission lines and 5 GW capacity of HVDC terminal at Pang (Ladakh) and Kaithal (Haryana).

The project is due for completion by FY30 with an estimated cost of Rs 20,800 crore and central assistance of Rs 8,300 crore (40 per cent).

On the receivables front, PGCIL saw recoveries of Rs 1,700 crore out of Rs 2,400 crore of dues under the late payment surcharge (LPS) rules during Q4 FY24.

Total receivables outstanding decreased from Rs 7,140 crore in Q1 FY24 to Rs 4,850 crore in Q4 FY24.

Modest capitalisation (only Rs 7,600 crore for FY24) impacted earnings adversely but rising capex through the next few financial years should also increase capitalisation base, which means better earnings.

Asset capitalisation (new assets contributing to revenues) should double to Rs 15,000 crore in FY25 and rise above Rs 20,000 crore in FY26.

The nature of core business guarantees stable returns and the company pays regular dividends.

But valuations are high for a business with regulated tariffs and relatively-low growth visibility. Despite its market dominance and predictable earnings, many analysts say it’s overvalued.