Power Grid Corporation's prospects factored in at current valuations

Power Grid Corporation (PGCIL) intends to ramp up its capex substantially through the next two financial years.

The Public Sector Undertaking (PSU) utility posted flat consolidated revenues of Rs 10,700 crore in the third quarter of the current financial year (Q3FY24) and reported 7 per cent year on year (Y-o-Y) growth in net profit to Rs 4,000 crore.

The Q3FY24 capex stood at Rs 3,440 crore and capitalisation at Rs 1,780 crore, taking the 9MFY24 total to Rs 8,700 crore capex and Rs 5,800 crore capitalisation, respectively.

Management maintained FY24 target capex at Rs 10,000 crore and capitalisation at Rs 8,500 crore, split equally between projects awarded under the regulated tariff mechanism (RTM) route and projects under tariff-based competitive bidding (TBCB).

For FY25, the planned capex is at Rs 15,000 crore, up from earlier guidance of Rs 12,500 crore, alongside capitalisation of Rs 17,000 crore for FY25.

The work in hand is Rs 77,700 crore, of which TBCB projects are at Rs 41,400 crore and the rest is RTM.

The order flow has increased from Rs 50,500 crore in Q2FY24.

For FY26, PGCIL is guided for a capex of Rs 20,000 crore.

There's also a possibility of further enhancements with the visibility of Rs 2 trillion capex over the next decade.

The draft regulations of the Central Electricity Regulatory Commission (CERC) for multi-year tariffs over FY25-FY29, indicate that operations & maintenance (O&M) costs allowed in transmission have been lowered to 65 per cent for substations and increased to 35 per cent for transmission lines.

Also, O&M costs have been allowed for reactors.

Management indicated these proposals would have no net impact on the company's realisations.

The permissible return on equity for new transmission projects commissioned after March 31, 2024 will be reduced from 15.5 per cent earlier to 15 per cent under the proposed scheme.

This will affect PGCIL which is seeking further clarity on the subject.

PGCIL has a two-thirds win rate in TBCB bids with 10 project wins in FY24.

But profitability (11-12 per cent internal rate of return or IRR) is lower, given competition, compared to RTM projects (where approx. 14 per cent IRR is available).

Given good cash flows, PGCIL can comfortably execute incremental projects of Rs 25,000-30,000 crore, assuming four times debt to equity ratio.

In renewables, PGCIL guided for a capex of Rs 1,000 crore for solar projects over the next nine years, of which it aims to invest Rs 700 crore in 22MW of solar capacity staggered over two stages of 8MW and 14MW.

The outlay for solar may increase.

The National Electricity Policy (NEP) had earlier planned a capital outlay of Rs 2.44 trillion for inter-state transmission projects, which have been enhanced to Rs 3.1 trillion.

The lack of sufficient battery-related storage systems at scale has meant higher transmission outlay.

The company has to manage potential issues in the global supply chain for HVDC projects, which could mean extended timelines on the Fatehgarh-Bhadla transmission project in Rajasthan.

In valuation terms, PSU power stocks tend to trade at lower discounts than the private sector.

However, there's scope for the valuation gap to narrow given PGCIL's dominance of its segment.

Some analysts do see much of the future value priced in at the current price to book value of nearly three times on projected FY26 results, and long-term earnings per share growth of roughly 5 per cent.

About half the analysts tracking the stock have a buy rating.

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