Key takeaway: The ministry of new and renewable energy (MNRE) approved Rs 159bn in inter-state transmission projects. Power Grid’s (PGCIL) board is meeting on 15 Dec 2021 to discuss an interim dividend. The ministry of power (MOP) has reviewed the potential `500bn Ladakh project for updates. Media reports indicate PGCIL might further monetise assets through the Invit route in FY23E. We revise our PT to Rs 250 (from Rs225) at 2.1x PB Sept 23 (from 1.8x). Buy.
2.4x q-o-q rise in transmission bid pipeline in 2QFY21 to Rs256 bn: MNRE and MOP approved Rs 159bn worth of inter-state transmission line projects in Dec 2021, which is a step in the process of PGCIL’s bid pipeline actually being awarded. The projects are mainly for evacuating Renewable Energy (RE) projects – 14 GW in Rajasthan, 4.5 GW in Gujarat and 1 GW in Madhya Pradesh. In Nov 2021 the ministries simplified transmission project planning by dissolving regional committees that were an added layer for incremental approvals. We believe as RE generation bids continue to pick up, given the shorter 1-yr set-up time vs 4-yr for thermal, the transmission pipeline should directionally move higher.
Rs 500bn potential Ladakh T&D project on ministry’s agenda: Ministry chaired a meeting for updates on the 10 GW planned RE project in Leh and associated works in Nov 2021. 20,000 acres were identified for immediate usage and another 20,000 was being identified. PGCIL was directed to revise the draft for transmission evacuation with a project completion time of 5 years. PGCIL in a past analyst meet highlighted this could be a Rs 500bn project with `210bn spent in the first phase. Since then no further details have been given and final numbers and whether PGCIL could be given some portion on nomination basis are catalysts for the company.
Media reports indicate Rs 75bn assets could be monetised in FY23E: PGCIL has won 22 projects under Tariff Based Competitive Bidding (TBCB) worth `364bn. Five operational projects of Rs 72bn were monetised in 1QFY22. Five of Rs 154bn are operational and balance of 12 projects of Rs 138bn are awaiting completion. National Monetisation Plan points to Rs 75bn monetisation in FY23E and Rs 150bn in FY24E and FY25E each for PGCIL. We believe it is now in a virtuous cycle of paying higher dividends through monetisation.
30-40% potential upside to FY23E Rs 75-100bn capex target: PGCIL has a market share of 40% in TBCB projects. An incremental `148bn pipeline addition could see capex target for FY23E rise to Rs 105-130bn. PGCIL traded at 2-2.1x PB in the past when visibility on T&D capex and rising earnings growth picked up. We revise our PT to Rs 250, valuing it at 2.1x PB Sept. 23E vs 1.8x earlier, factoring incremental developments post 2Q which further strengthen the rising pipeline visibility. Implied PE is 11.1x Sept 23, which is the historical mean PE for PGCIL.
Dividend yield is 5%, with non-core initiatives like smart metering, distribution business, EV charging offering future option value. Reported ROE should improve to 19-19.6% from 17-17.5% and move higher as payout rises. Downside risks: 1) PGCIL losing share sharply in TBCB. 2) Stance change in InvIT monetisation or use of proceeds.