Delay in award of projects could affect profitability; valuations do not factor in growth potential; ‘Buy’ retained with TP of Rs 222.
Power Grid’s (PWGR’s) Q4FY20 results highlight steady performance in the Transmission segment. Adj. PAT increased 7% y-o-y even as Consultancy/ Telecom Ebit declined 7%/4% y-o-y. FY20 capitalisation stood at Rs 182 bn given the delay in commissioning of Raigarh-Pugalur.
Awards worth Rs 230 bn are up for bidding under various schemes; however, we expect some delays. In this context, a declining order book does put a risk of slowdown in growth. However, valuations at 1.3x FY22E P/BV and ~8-9% FY22E dividend yield remain attractive for a company with steady RoEs of ~17%. Maintain Buy with a DCF-based TP of Rs 222/share.
In line with steady growth in core transmission Adj. for prior period revenue, Rs 4.25 bn of one-off gains on tariff order and Rs 1.22 bn of one-time tax, S/A PAT grew 7% y-o-y to Rs 28.6 bn (5% higher than est.). For FY20, Adj. S/A PAT increased 7% y-o-y to Rs 103.3 bn. Profit from TBCB subsidiaries was up 91% y-o-y to Rs 3.7 bn in FY20. S/A capitalisation for the quarter stood at ~Rs 46 bn while capex stood at ~Rs 35 bn. For FY20, at group level (incl. TBCB), capitalisation came in at Rs 182 bn with overall capex of Rs152 bn.
Management guides for ~Rs 200-250 bn capitalisation in FY21
PWGR has set FY21 capitalisation target of Rs 200-250 bn. Majority of this capex is toward commissioning of Raigarh-Pugalur (Rs 150 bn). According to the company, it has resolved much of the RoW issues faced and plans to commission Bipole-I by Jul’20. The company noted that it has proposed five TBCB assets to be transferred for InvIT.
Valuations remain attractive
While awarding of transmission schemes (~Rs 250 bn) under renewable integration provides good opportunity for PWGR to win new awards, deferment in awarding could impact the pace of growth in profitability. However, the subsequent lower capex (along with removal of DDT) also implies potential of higher dividends (FY22e dividend yield of ~8-9%). Besides, the longer-term picture remains intact as investment in renewable energy and growth in power demand would necessitate the need for transmission works. Valuations at 1.3x FY22e P/BV remain attractive for a company with steady RoEs of ~17% and does not capture any growth potential (EPS FY20-22E: 7% CAGR).