Power Grid Research Report By Motilal Oswal

Expect strong double-digit IRRs in TBCB projects

A strong business and attractive valuations keep us optimistic

Analysis suggests strong double-digit IRRs in TBCB projects

We analyzed the tariff-based competitive bidding (TBCB) projects from the annual reports of Power Grid’s (PWGR) subsidiaries. In our view, PWGR will generate more than 14% equity IRR (debt/equity ratio of 80/20) on its TBCB projects.

The equity IRR on the three projects that are fully commissioned is ~24-38%. PWGR enjoys a competitive edge due to its (a) low cost of borrowed funds, (b) dominant position with suppliers and (c) vast geographical spread, which should continue driving healthy returns.

International experience: Even developed countries need to keep investing

Transmission order inflows are expected to be low over the next few years, but the long-term growth potential is huge. Experience from China and the US suggests that the transmission infrastructure continues increasing in tandem with generation (demand) growth.

Renewable generation capacities, flexibility and redundancy requirements also aid transmission investment, as seen in the US/UK over the past few years.

India, with just one third of the world’s per capita electricity consumption, has huge growth potential. Separation of carriage and content, as proposed in the draft Electricity Act, will provide another growth stream to PWGR, in our view.

Intra-state to aid growth; Consultancy and Telecom to grow strongly

Intra-state transmission opportunity is ~1.5-2x the size of inter-state transmission in India. However, states have been reluctant to offer intra-state projects on TBCB due to healthy regulated returns.

Unlike their DISCOMs, state TRANSCOs are not cash starved. PWGR expects a pick-up in TBCB activity from states like Jharkhand, UP, Telangana and Tamil Nadu.

Its JV proposal with UP is also in the final stages. Consultancy and Telecom businesses are expected to grow at a healthy 15-20% over the next few years. Success in the telecom towers business (pilot running successfully over the past year) will support growth in Telecom.

Strong business and attractive valuations; Re-iterate Buy

PWGR has ~INR1t of orders pending execution, providing strong visibility of EPS CAGR of ~12% over FY18-22. The earnings estimate factors in a 150bp cut in the regulated RoE (to 14%) in the next tariff regulations.

However, with bond yield rising over the last few months, the extent of such cut could be lower, in our view. At CMP, the stock is trading attractively at 1.4x FY20E P/BV for an RoE of ~16% and a CoE of ~10-11%, not appreciating any future growth potential.

If we were to assume no growth after FY20, which means PAT is available for dividend distribution, the stock is trading at an attractive dividend yield of ~11% for an assured return model and revenues backed by state-guarantees (g-sec yield is ~7 to 8%). We re-iterate our Buy rating with a DCF-based target price of INR287/share.