Proposed regulatory changes and tepid growth in project commissioning rate are the key risks faced by state-owned power transmission company Power Grid Corp of India (PGCIL), analysts said.
The Central Electricity Regulatory Commission (CERC) proposing to lower the regulated return on equity (RoE) below 14% from 15.5% can dent returns, Axis Capital said in a recent note. The regulator’s new proposed tariff structure also suggests returns to be contingent on the amount of electricity flowing through transmission networks, as opposed to the existing system of asset availability. This, if implemented, could have an impact on PGCIL’s earnings, analysts at Edelweiss noted. PGCIL’s core RoE declined 170 basis points year-on-year to 11.2% in the quarter ended June 30.
The entire Rs 1.1 lakh crore worth of total projects in PGCIL’s hand will be capitalised in the next two to three years, IDFC Securities observed. Of the total projects in hand, Rs 45,000 crore was bagged on cost-plus basis while orders for Rs 16,500 crore were won through tariff-based competitive bidding (TBCB).
The remaining Rs 37,000 crore of projects are under the capital work in progress account. Power transmission projects are increasingly being awarded through TBCB, marking a shift from the traditional cost-plus regime.
“New projects awarded remain a key monitorable for future capex as transmission projects typically have a gestation period of two-three years,” Edelweiss said. Since 40-50% of PGCIL’s capex is dependent on the capacity addition of its associated generation projects, “any delay in these generation assets will cascade to a delay in PGCIL’s project execution slowing its pace of growth”, the agency added. Capex in Q1, FY19 was Rs 6,400 crore, 1.6% higher than in the corresponding period last fiscal.
PGCIL’s management expects total capitalisation of Rs 28,000 crore in FY19, which would be marginally higher than the Rs 27,900 crore capitalised in FY18. Capitalisation (including foreign exchange rate variation) grew at 4% y-o-y in Q1 of FY19, with the power transmission behemoth commissioning projects worth Rs 2,500 crore in the quarter. “Historically capitalisation has been lumpy; hence, we expect it to pick up in coming quarters,” Axis Capital said.