“Power Grid: Weak Earnings and Lofty Valuations Overshadow Promising Project Wins”

Weak Earnings Performance

• Flat Profit Growth: Earnings stagnated with PAT at Rs37.9 billion in 2QFY25, reflecting weak core performance despite support from higher other income and telecom revenues.
• Core Revenue Underperformance: Core transmission revenue grew by only 3% YoY, hindered by weak asset capitalization over the last year.
• JV Losses and Weak Incentives: Increased JV losses (Rs1 billion, largely from EESL) and declining incentive income (-50% YoY) indicate structural profitability challenges.

Capitalization Weakness Despite Encouraging Capex

• Underwhelming Capitalization: 2QFY25 capitalization was weak at Rs16.8 billion (-29% YoY), lagging significantly behind the FY2025 guidance of Rs180 billion.
• Mismatch Between Capex and Capitalization: Although capex spending was strong (Rs54 billion in 2QFY25, Rs100 billion in 1HFY25), it is not translating effectively into earnings growth or asset utilization.

Overdependence on Future Project Wins

• Aggressive Capex Guidance Raises Concerns: Management’s elevated capex guidance of Rs250-300 billion in FY2026E and Rs350-400 billion in FY2027E could strain financials if execution and capitalization remain weak.
• Reliance on TBCB Projects: Significant dependence on tariff-based competitive bidding (TBCB) projects (Rs36.7 billion contribution in 2QFY25) makes earnings more uncertain due to competitive pressures and regulatory risks.

Rich Valuations for Limited Growth Prospects

• High Valuations: Current valuation metrics of 18.6X P/E (as on 20.11.2024) and 3.18X P/B appear stretched, especially given the modest 8.7% earnings CAGR projected over the next three years.
• Low Dividend Yield Relative to Risk: A dividend yield of 3.8% in FY2025E does not adequately compensate for the single-digit growth and execution risks.

Persistent Operational Challenges

• Foreign Exchange Exposure: Higher other expenses, likely from currency fluctuations, add volatility to earnings.
• Lackluster Return Metrics: A modest growth in the gross block (2% YoY) combined with underwhelming capitalization reduces the attractiveness of return on assets.

In conclusion, while Power Grid has demonstrated strong project wins and future capex plans, the disappointing earnings performance, weak capitalization, and rich valuations suggest limited upside potential.

Source: Kotak Daily
(11.11.2024)