The Indian power sector has been in the spotlight with surging electricity demand, a governmental drive towards renewable energy transition, and higher capex outlay in power generation and transmission space. Power transmission PSU, the Power Grid Corporation of India (PGCIL) has been a key beneficiary, with its stock having surged by around 190 per cent (300 per cent if dividends are included) in the last five years.
At bl.portfolio, since our buy rating on the stock in edition dated January 17, 2021, it has delivered a total return (inclusive of dividends) of 260 per cent. We had remained positive throughout this period with follow-up calls recommending accumulating the stock, owing to PGCIL’s near monopoly status, reasonable valuation, a healthy dividend yield and an assured earnings model.
Currently, from a valuation perspective, PGCIL’s stock is trading at a trailing Price to Book (P/B) ratio of 3.4 times, a premium of 80 per cent compared to its five-year average of around 1.9 times. While PGCIL’s business model and balance sheet remain strong, providing sufficient room for incremental capex, investors might consider booking partial profits due to the spike in stock price and valuation. However, we do not recommend a complete exit, as the company will continue to play a crucial role in India’s energy transition.
Business
Conferred with Maharatna status, PGCIL transmits 45 per cent of the power generated in India through its extensive transmission network, which spans over 1,77,699 circuit km as of March 2024. The bulk of PGCIL’s revenue comes from the power transmission segment, accounting for 96.5 per cent in FY24, with the remaining revenue derived from other business segments, including telecom (1.5 per cent) and consultancy (2.0 per cent).
Within the transmission segment, around 95 per cent of revenue is generated from regulated tariffs set by the Central Electricity Regulatory Commission, with the remaining 5 per cent earned under tariff-based competitive bidding (TBCB). The regulated tariff model ensures a complete pass-through of costs plus a 15.5 per cent pre-tax Return on Equity (RoE) on completed projects awarded under the regulated tariff mechanism (RTM).
However, the RoE for new projects has been marginally reduced by 50 basis points to 15.0 per cent, effective from April 2024 to March 2029. Despite this reduction, the impact on PGCIL’s earnings is expected to be minimal, as most of the incremental capacity addition will be based on TBCB rather than RTM. Under TBCB, PGCIL competes with private sector players such as Adani Energy Solutions and Sterlite Transmission.
Performance
Over the past decade, PGCIL has consistently achieved a plant availability factor exceeding 99.5 per cent, well above the normative level of 98 per cent. This high availability allows it to recover annual transmission charges, which encompass the Return on Equity (RoE), interest on term and working capital loans, operations and maintenance, and depreciation.
On the TBCB front, PGCIL won 13 projects in FY24. The company has demonstrated a strong track record in securing TBCB projects, winning one out of three in FY21, three out of nine in FY22, and 12 out of 18 in FY23. According to the management, the EBITDA margin for TBCB projects has been almost equivalent to that of projects executed under the RTM. As on May 1, 2024, PGCIL has ₹86,700 crore worth of ongoing projects, including ₹26,872 crore in TBCB projects.
On a consolidated basis, the company’s revenue from operations in FY24 grew by a modest 4.2 per cent year-on-year (YoY), primarily due to a slight decline in sales in the transmission segment (-0.14 per cent). This decline can be attributed to the slower pace of asset capitalisation (or project commercialisation) of ₹7,618 crore, compared to earlier guidance of over ₹10,000 crore. EBITDA increased by 4.1 per cent YoY due to lower transmission charges, with margins remaining stable at 87 per cent. Furthermore, net profit saw a flattish growth of 1.2 per cent YoY.
The company has consistently reduced its debt-to-equity ratio, from 2.4 times in FY19 to 1.4 times in FY24, driven by stable earnings visibility underpinned by the regulatory return model. In FY24, the company paid out dividends of ₹11.25, implying a dividend yield of 3.5 per cent with a payout ratio of 67 per cent. In FY24, PGCIL incurred a capital expenditure of ₹12,500 crore, surpassing its committed capex of ₹10,000 crore. Looking ahead, management has revised the capex guidance upwards to ₹15,000 crore and anticipates doubling asset capitalisation from ₹7,618 crore in FY24 to ₹15,000-16,000 crore in FY25.
Valuation call
Overall business remains stable and good. However, the valuations are stretched and deceleration in growth in FY24 and next year or so, could result in stock underperforming. PGCIL’s stock price has returned 190 per cent (290 per cent including dividends) in the last five years while the earnings in absolute terms have increased by only 32 per cent on account of modest capitalisation during the same period.
As per Bloomberg Consensus Estimates, PGCIL is currently trading at a one-year forward Price to Earnings (PE) ratio of 17.6 times, a premium of 72 per cent compared to its five-year average of 10.3 times. This also appears pricey considering FY25 earnings growth is estimated at 7.1 per cent. While incremental capex in the forthcoming years signals better earnings prospect from a higher capitalisation base, the stock price has already factored it in. Hence, on account of steep rise in valuation leaving less comfort on margin of safety, investors can consider partial book profits.