Media reports indicate that power ministry is in talks with Power Grid (PGCIL) to purchase PFC’s 52.63% stake (`144 bn) in REC. Rationale is for PFC to finance power projects through REC stake sale proceeds. PGCIL has sufficient cash and we remain positive on the 1-yr and medium-term transmission spend growth story. But, this is a near-term dampener and could negatively impact FY23e-25e EPS by 3-5%. Dividend yield could also be lower at 4% vs 6% in FY23e.
Good governance history under the scanner: PGCIL has a commendable execution track record and a dominant leadership position in transmission even with private competition being introduced 2013 onwards. NTPC in the past made investments outside the core like fertilisers on ministry directives, but PGCIL has been relatively insulated. If stake purchase news materialises, multiple is likely to get impacted. PGCIL could potentially trade at the lower end of 2-2.2x PB, where it has traded when visibility on T&D capex and rising earnings growth picked up.
Returns and earnings profile to not swing materially: PGCIL has entered a phase of higher free cash flows and raised its dividend payout in the last 12 months. We believe the stake purchased, which is approx. Rs 21/sh, is unlikely to be valued by the market.
FY23E capex targets could see upside based on wins: PGCIL did capex of Rs 14.8 bn in Q1FY23 (up 34% y-o-y), and mentioned while it is targeting Rs 80-85 bn capex for FY23E, it could be higher. PGCIL de-rated consistently for 5 years until 2020 as earnings growth slowed and pvt sector competition picked up. This trend should continue to reverse as capex/capitalisation picks up post FY23e due to transmission capex for renewable energy. Rs 66 bn asset monetisation is planned in FY23E and smart meters $19 bn opportunity is seeing progress. Our PT of Rs 260 values it at 2.2x consol PB Sept’24E – in-line with the 10-yr average. Downside risks: (i) PGCIL losing share sharply in TBCB; and (ii) Stance change in InvIT monetisation or use of proceeds .