Power Grid rating – Buy: Strong show by transmission segment

Power Grid (PWGR)’s result highlights strong underlying numbers for its Transmission segment—implying ~18% y-o-y growth. Reported S/A PAT was further aided by higher other income, resulting in a 24% y-o-y rise. PWGR has won Rs 90-100 bn of awards in Q3, which is a positive, given a declining order book. Valuations at 1.5x FY22e P/BV and ~7% FY22e dividend yield remain attractive for a company with steady RoEs of ~17%. Maintain Buy, with DCF-based TP of Rs 248/sh.

Profit boosted by higher other income
PWGR’s adj. S/A PAT was up 25.4% y/y to Rs 33 bn (16% ahead of our est.) on account of higher other income. Even adjusted for the same, underlying transmission numbers are strong and imply ~18% y-o-y growth, in our view. Other income was up 25.7% y-o-y to Rs 6.4 bn. This was led by higher late payment surcharge income and higher dividends from subsidiaries.

Profitability in the Telecom segment declined 16% y-o-y to Rs 0.9 bn, and for the Consultancy segment, it fell 38% y-o-y to Rs 0.4 bn. Capitalisation for the quarter stood at Rs 6.8 bn, while capex was at Rs 29.4 bn at the group level.

Management commentary highlights
PWGR noted billing realisation improved and stood at 95.7% for 9M. Receivables also declined to 63 days at the end of Q3 (v/s 69 days in Q2FY21 and 86 days in Q1FY21). The co. plans to reduce this to 50–55 days. PWGR has filed the draft issue of InvIT and is awaiting SEBI clearance for the same. The co. plans to launch the issue by the end of March.

Decline in capitalisation could impact growth, but valuations attractive
The recent awarding of Rs 90–100 bn provides some respite to a declining order book. While the awarding of transmission schemes under renewable integration presents a good opportunity for PWGR to win new awards, our checks suggest continued challenges, which could lead to the deferment of awarding. If new orders do not continue to come in, a declining order book could impact the pace of growth in profitability.

However, subsequently lower capex (along with the removal of DDT) also implies potential for higher dividends (FY22e div. yield of ~7%). Besides, the longer term picture remains intact as investment in renewable energy and growth in power demand would necessitate the need for transmission works.

Valuation at 1.5x FY22e P/BV remains attractive for a company with steady RoEs of ~17% and does not capture any growth potential (EPS FY20–23e: 9% CAGR). Maintain Buy.