Stock Analysis | Power Grid Corporation of India Limited (NSE:POWERGRID): Q3FY23 Results Out; Total Income rises 7% YoY

Power Grid Corporation of India Limited (NSE:POWERGRID) is a state-owned company that operates in the power transmission business in India. It is responsible for planning, implementing, operating, and maintaining the inter-state transmission system and the national and regional load dispatch centers. PGCIL moves large blocks of power from central generating agencies and areas with surplus power to load centers within and across regions.

The company’s operations are divided into three segments: Transmission, Telecom, and Consultancy. The Transmission segment includes the extra high voltage/high voltage (EHV/HV) networks and grid management. It also owns EHV alternating current (AC) and HV direct current (HVDC) sub-stations. The Telecom segment includes transmission infrastructure, enterprise services, and topologies. The Consultancy segment provides various services such as planning, design, engineering, load dispatch, procurement management, operation and maintenance, financing, and project management.

Power Grid Corporation of India Limited (PGCIL) enjoys the support of the Government of India (GoI), which extends guarantees for some of its borrowing programs. This enables the company to raise long-term funds at competitive rates. PGCIL has been playing a crucial role in the development of India’s power sector by facilitating the integration of regional grids into a national grid, thereby ensuring reliable and efficient power supply across the country.

As of December 31, 2022, Power Grid Corporation of India Limited owned and operated an extensive network of electric transmission lines covering 1,73,790 circuit km (ckm) and 270 sub-stations with a total transformation capacity of 4,93,042 MVA. The company’s transmission network achieved excellent operating performance metrics in FY22 with 99.83% system availability.

Apart from its transmission business, the company also operates a telecom segment that owns and operates ~76,712 km of telecom network, with point of presence in 458 locations and points of interconnections in 780 locations across 256 cities. Powergrid also offers transmission related consultancy to 150+ domestic clients and 25+ global clients in 23 countries.

Powergrid has also monetized its assets, mainly High Voltage transmission lines and substations, through the Infrastructure Investment Trust (InvIT) model. The company was the first PSU in the country to undertake this model and used the proceeds to fund new and under construction projects. Total amount raised through asset monetization during FY22 was Rs. 8,370 cr, and for FY23, the asset monetization target is Rs. 7,500 cr, out of which the company plans to raise Rs. 6,600 cr under the National Monetisation Plan in H2FY23. The monetization targets for FY24 and FY25 are pegged at Rs. 15,000 Cr.

The company has made several strategic moves to diversify its business and explore new ventures. Firstly, it has incorporated a subsidiary company called POWERGRID TELESERVICES LTD, which has received the Unified license for National Long Distance (NLD), International Long Distance (ILD) and Internet Service Category-A (ISP-A) Service from Department of Telecom. The telecom business is expected to be hived off into this company in FY23E subject to necessary approvals. The company is exploring new business opportunities within the telecom segment such as setting up a Data Center, International Long Distance (ILD) Bandwidth Business to directly serve neighbouring countries with reliable connectivity, and establishing a pilot Data Centre at Manesar, Gurugram at an estimated cost of Rs. 322 cr. The management targets to increase the telecom income to ~Rs. 200 cr per quarter in FY23.

Secondly, PGCIL is exploring opportunities for installation of smart meters for state utilities under DBFOOT model where it will be receiving monthly rentals. An MOU has been signed with Gujarat discom for installation of 66 lakh smart meters, and discussions are ongoing with other states like MP and Karnataka. The implementation period for smart meters is 2.5 years, and 7.5 years will be the O&M period. The pricing will be decided after receiving the bids from meter manufacturers, but it will be on a cost-plus basis. The company has also initiated the process for procurement of 1 Cr smart meters, and the project will be implemented through nomination route by PGCIL (through its subsidiary) itself, expecting a WACC return of 10%. Project execution is expected to start Q1FY24 onwards, and payment will be received through fixed monthly rentals on a per-meter basis for 90 months.

Thirdly, PGCIL envisages Battery Energy Storage System (BESS) to be a significant element of the future grid. Accordingly, it has appointed a consultant to study the business scope for it in the BESS segment and is looking to set up a BESS system. PGCIL has also set up a wholly-owned subsidiary called POWERGRID Energy Services Limited to invest in and act as a project management consultant in new and emerging business areas of Energy Management, Smart Meters, Smart Grid, Energy Storage, etc. Additionally, the company is evaluating setting up solar generation capacity on vacant land available with it, and preparations are being made to build the company’s first solar PV plant at Nagda, MP. The power generated would be either utilized for in-house requirements or sold through exchange/ PPAs.

The risks and concerns for Powergrid include overdue receivables from some state utilities, which have increased from the previous year. Execution risk is a concern due to the large capital expenditure required for building transmission assets, and any delay or challenges could lead to time and cost overruns. Competition from private players could also lead to lower profitability and the inability to win projects. Operational inefficiency, such as a sustained fall in line availability, could affect cash flows. As a government-owned company, there is a risk of promoter interference in carrying out unrelated diversifications, leading to a de-rating, and the cash flow generated may not be utilized optimally. There is also a regulatory risk due to possible changes in tariff regulations from 2025-2029, which may bring down the regulated Return on Equity (RoE).

The Powergrid Corporation Ltd has reported a YoY increase in revenue from operations of 7.5% to Rs 10,746.4 crore for the quarter ending December 2022. Core transmission revenues grew by 7% while revenues on a consolidated basis grew by 7.8%. The company announced a second interim dividend of Rs 5 per share during Q3FY23. However, the growth rates in the transmission business have settled in the single digit domain. The company’s roadmap for getting new projects in the renewable segment and likely diversification in the distribution business is expected to set the tone for growth trajectory in the medium to long term. However, the growth rates in the transmission business have settled in the single digit domain. The company’s roadmap for getting new projects in the renewable segment and likely diversification in the distribution business is expected to set the tone for growth trajectory in the medium to long term.

The company capitalised assets to the tune of 5190 crore whereas in 9MFY23, the same was at 2886 crore YoY. The capex incurred during 9MFY23 was at 5429 crore on a consolidated basis. For FY23E and FY24E, the company expects to capex of  8000-8800 crore. Consolidated gross block as of 9MFY23 was at 268903 crore while debt was at 128476 crore. CWIP as of Q3FY23 was at 13427 crore vs. 13677 crore in Q3FY22. The company has invested 3297 and 441 crore equity in operational TBCB and Under construction TBCB projects, respectively.

The average cost of borrowing was at 7.08% in 9MFY23 vs. 6.3% in H1FY23. The company has 47600 crore of work in hand, of which, 7600 crore is for ongoing projects, 27000 crore for new projects, and 13000 crore for TBCB projects. Outstanding dues were at 6043 crore in Q3FY23 vs. 4868 crore in Q2FY23. Receivables days were at 47.6 days. Since interest rates have increased, yield expectations have gone up, resulting in a decline in the fair value of assets which PGCIL has identified for monetisation. PGCIL is contemplating securitisation of cash flow to raise funds instead of asset monetisation.

The company is well positioned to benefit from the transmission opportunities arising from robust capacity addition across the renewable space. The market is expected to witness a transmission opportunity of Rs. 1,40,000 Cr over the next five years, mainly through Tariff based competitive bidding (TBCB). Overall, while the growth in capitalization may reduce for a few years, revenue, profit growth, and book value addition could still occur at a slower pace, given the company’s strong market position, dividend yield, and attractive valuation ratios.