Power Grid stock may be fully pricing in near-term growth prospects

Public sector undertaking (PSU) Power Grid Corporation of India is the country’s largest power transmission utility with transmission lines of 174,113 ckt (circuit kilometre) and 499,360 MVA (mega volt amp) of transformation capacity.

It transmits about 45 per cent of total power generated in India. It also undertakes transmission-related consultancy to more than 150 domestic clients and owns and operates 71,673 km of telecom networks.

In the fourth quarter of the 2022-23 financial year (Q4FY23), firm’s revenue from operations increased 12.5 per cent year-on-year (YoY) to Rs 11,494.9 crore. Core transmission revenues grew 15 per cent YoY at Rs 11,502.3 crore. Consultancy income was at Rs 208.8 crore, and on a consolidated basis, revenues grew 14.8 per cent at Rs 12,263.7 crore. The adjusted profit after tax (PAT) came in at Rs 4,433 crore (down 3.3 per cent YoY, and up 27 per cent quarter-on-quarter (QoQ)).

The company reported an Ebitda of Rs 10,900 crore-- up 17 per cent -- benefiting from lower transmission charges during the quarter. The company had a capex of Rs 9,200 crore and capitalisation of Rs 7,400 crore during FY23 and was guided for a capex of Rs 8,800 crore and capitalisation of Rs 10,000-Rs 11,000 crore in FY24.

The company is a steady performer with good dividend yield (payout was Rs 14.75 in FY23, same as FY22). But a large asset base (Rs 2.7 trillion) impedes its ability to push growth rate above single digits, and hence makes high valuations hard to justify. Downstream diversification into smart metering and T&D infrastructure could be new revenue streams. 

Green energy corridors and incremental network strengthening schemes will continue to feed growth. The target of 371 GW of additional renewable power capacities, as well as general power capacity addition, will mean new investments in the transmission sector. Industry reports assume an investment of Rs 2.4 trillion in green energy corridors, and an equivalent amount for system strengthening over the next decade. If Power Grid gets 50 per cent of the new projects, that would translate into an investment of about Rs 25,000 crore, which would be about 9 per cent growth of the asset base. The clearance of three projects -- worth about Rs 389 crore -- is only the start of this network expansion.

The management claimed that tenders for Rs 31,000 crore are already under bidding for integrating 500GW of renewable projects by 2030. The company is exploring two overseas transmission opportunities, one each in Kenya and Tanzania. The Kenya project is around $250 million with 40:60 stake of the PSU and Africa50. The company has received in-principle approval and submitted a definitive proposal for the same. The project size for Tanzania is around $300 million and is in early stages.

A large part of the firm’s business is under the regulated tariff mechanism, and the Central Electricity Regulatory Commission reviews the tariff mechanism every five years. The current review will mean a new period starts from April 2024.

The consultation paper, which is a preview to new draft regulations, favours keeping rate of return unchanged, but also suggests lowered return for transmission assets that have a shorter gestation period and lower execution risks. The paper also talks about extending the life of transmission and generation assets, which in turn would alter the project IRR (internal rate of return). History suggests that regulatory outcomes are usually neutral for the PSU but this does introduce some uncertainty for the utility. 

The stock touched a high of Rs 259 last Wednesday and is trading at around Rs 250 at present. It is up about 20 per cent since lows of January 2023. Although analysts are bullish on the stock, it may be fully valued at these levels. According to Bloomberg, three of the four analysts polled in June have a ‘buy’/’add’ rating, and one has a ‘hold’ rating. Their average target price is Rs 250.