Power Grid may benefit from higher investments in renewable energy

Power Grid Corp. of India Ltd has got a fillip from an upturn in transmission sector capex with projects under execution more than doubling over the past year. The order book has got a further leg-up with the award of letters of intent for two projects this month, including one on Wednesday.

However, execution timeline of at least 12-18 months implies that gains from the projects would be visibleonlyafter FY26.

The state-owned transmission company, operating nearly 45% of domestic transmission capacity, has seen a sharp increase in ordering activity over the past one year.

The company derives revenue from the use of its transmission network. The total value of transmission projects under execution has risen sharply from less than ₹50,000 crore at the end of the June 2023 quarter (Q1FY24) to over ₹1.1 trillion by Q1FY25. Orders are being driven by the initiation of a large number of renewable energy projects, primarily located in regions unconnected with transmission networks so far.

“The long-awaited transmission capex is now showing a gradual upturn, underpinned by renewables and growing generation capacity including thermal,” said analysts at JM financial Institutional Securities in a report after Q1FY25 results.

This would significantly benefit Power Grid that has a market share of 65-70% in new orders. The management has stated that about ₹1 trillion of projects are in the pipeline across inter-state, intra-state, cross-border and international transmission, of which 70-80% may be awarded in FY25.

The company raised its capex target for FY25 from initial guidance of ₹15,000 crore to ₹18,000 crore to meet the completion schedule of these projects. This contrasts with average capex of ₹10,000 crore over the last three years. While Power Grid has diversified into telecom business, leveraging its transmission network to build optic fibre network, the contribution of the business is only about 2% currently.

“The company is currently at 3.1-3.3x price-to-book FY26E-27E, versus the previous upcycle peak of 3.9x and average of 3x. Valuation history shows Power Grid re-rates and derates in line with capex trend,” said analysts from Jefferies India in a report on 18 September.

While earnings growth would be lower than the previous upcycle, RoE (return on equity) should be higher at 17-18% versus 13-14% then, they added.

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Power Grid’s recent financial performance has been subdued with Ebitda declining marginally by 0.8% year-on-year in Q1FY25 after growing just about 1% in FY24. Ebitda is earnings before interest, tax, depreciation and amortization.

The near-term outlook is muted with analysts projecting an Ebitda growth of 4-5% CAGR over FY24-26. Furthermore, Power Grid has a high level of borrowings at over ₹1.2 trillion, thanks to the capital-intensive nature of the business. Yet, the high Ebitda margin of almost 87% helps keep net debt-to-Ebitda at manageable level of 2.9x.

All said, investors seem to be factoring in the brighter picture adequately. The stock has appreciated by about 64% in the past year led by improving power sector outlook and a steady increase in the company’s order book. The issue of bonus shares in September last year also provided additional impetus. Investors would closely watch the completion schedule of its projects for further cues.

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