Power Grid - Transmission Giant


Company Name – Power Grid Corporation of India (PGCIL)


Current Share Price – INR 230 (April 13, 2022)


Market Cap – INR 1,60,087 cr


 

1. What is interesting about the stock?


Scenes like these were a very common thing in India until the 90s. Even the first decade of the 21st century did not see much improvement. Power cuts had become a way of life for everyone in the country. The country was reeling from power failures both on the part of the power generators and power distributors. The Indian economy was like a caged bird that was restricted from reaching its full potential.


But there was 1 PSU that worked hard to free this bird and make power cuts a thing of yesteryears. This entity is the one that is working tirelessly to fulfill the promise of “Bijli Sabke Liye '' and is the one that is responsible for the effective running of the country’s electric grid. This entity is Powergrid Corporation of India.


Powergrid Corporation of India is the largest electricity transmission company in India. It is a “Maharatna” Central Public Sector Enterprise. Around 51% of the company is held by the Govt of India. The Company was ranked 44th in the Fortune India 500 rankings in FY20 & FY21.


The Company is responsible for over 50% of electricity transmission, and over 85% of India’s interstate & inter-regional electric power transmission system. It has

  • 1,72,437 km of transmission lines

  • 265 substations

  • 4,74,457 MVA transformer capacity

Electricity transmission contributes to ~90% of the Company's revenue. It had achieved 99.78% availability of transmission network in FY21. The Company earns transmission revenues based on the tariffs & charges structure decided by the CERC which is based on a hybrid methodology depending on the cost of delivery including estimates of the cost of losses during transmission per kWh of power transferred.


PGCIL also owns and runs its telecom network consisting of 73,409 km of telecom lines. The telecom unit has a presence in 458 locations and an intra-city telecom network consisting of 256 cities in India. This business is operated by POWERTEL which is the only Telecom Service Provider in the Country having pan India overhead optic fiber network using optical ground wire on power transmission lines.


Another major segment for the company is a transmission-related consultancy where it has over 150 domestic clients and more than 25 global clients in 21 countries.


PGCIL has also ventured into EV charging and has set up charging stations in Ahmedabad, Bengaluru, Delhi, Gurugram, Faridabad, Manesar, Hyderabad, Kochi, Kozhikode, Jammu, and Puducherry.


It is also developing a Smart Grid for better grid operations and is looking to develop in the areas of Smart Meters and Battery Energy Storage Systems to make this Smart Grid address the issue of variability from the rising renewable power sector.


The Company has a gross fixed asset base of INR 2.5 lakh cr as of 31st Dec 2021. PGCIL has also maintained a high dividend payout ratio of over 44% in the last 3 financial years or a dividend yield of 4.25%.


PGCIL has also floated its own Powergrid Infrastructure Investment Trust (“PGInvIT”) in April 2021 which raised over INR 7,735 cr for the company and has seen a rise of 32% since listing.


The main purpose of this InvIT was to monetize the assets of PGCIL in 5 SPVs in Vizag, Kala Amb, Parli, Warora, & Jabalpur. The Company intends to use the proceeds from this investment trust to finance new and under-construction projects.


PGCIL has work in hand of INR 24,500 cr (~2x of FY20/21 capex) as of Q3FY22. It is also bidding for a further INR 25,750 cr of new projects.


Being a big PSU, the Company is naturally not as agile as private corporations. It also has a lot of legacy infrastructure that is in dire need of modernization and computerization.


Industry Overview


The per capita power consumption in India is expected to grow a lot from the current level of 1208 kWh in FY20 to 1616 kWh in FY25 and reach over 2900 kWh by 2040. There are several factors behind this rise such as:

  • Economic growth in India

  • Rapid urbanization and Proliferation of household electronics

  • Universal access to power

  • A sustained rise in industrial activity

Several trends and developments are also expected along the way such as:

  • Rise of renewable energy in India and the rise in energy storage

  • Decreasing emissions

  • Reforms in Dicoms (once again!)

  • Smart metering

  • Cross border power transfer

The major competitors of PGCIL in India are:

  • Adani Transmission

  • Tata Power

  • Torrent Power

Of these Adani Transmission is into both transmission and distribution of power while Tata Power & Torrent Power are involved in the generation, transmission, and distribution of power.


Power transmission projects are floated by the Ministry of Power which it awards on a Build, Own, Operate & Transfer basis on a competitive bidding basis to successful bidders. This bid process is managed by an Empowered Committee constituted by the Ministry of Power.


A Transmission Service Agreement is signed between the SPV that builds and owns the projects and the concerned utilities associated with that project for payment of the transmission charges finalized based on competitive bidding.


Key MOATs

  • Large presence and robust network - The Company has a massive asset base of over INR 2.5 lakh cr and it is continuously developing more assets, putting in more lines to make electricity reach every corner of the country

  • Being a Maharatna PSU, the company has strong support from the Indian Government, and it plays a vital role in the development of the power sector in India. Thus, it can be said to be of strategic importance to the country

  • Strong operating efficiency with a system availability of over 99% and has surpassed the benchmarks set by CERC.

  • The company also has strong cash accrual of over INR 17,000 cr per year, which coupled with its operating metrics, enables it to raise funds flexibly despite having a leveraged capital structure of debt to equity of 2x.


2. Key Historical Financials

The Company saw its revenue growth CAGR for the last decade of over 16%. It has also seen a PAT CAGR of 17% and an average RoE of 16% in the same period showcasing itself as an all-weather performing business.


But revenue CAGR in the past 3 years was at 10% only showing moderation in revenue growth while PAT CAGR in the same period was at 37% showcasing rising efficiencies for the company.


The Company saw a fall in CFO in FY21 vs FY20 on account of an increase in working capital days. It also saw a fall in CFI since FY21 vs FY20 due to falling numbers of fixed assets commissioned. Company generated cash flow (CFO less CFI) of ~ INR 20,000 cr in FY21 which was used to pay down debt, support interest charges, and dividends to the equity shareholders.


3. What is my view on Company valuation?


PGCIL has seen a rise in its share price of 51% in the last 5 years vs the NIFTY 50 Index which has risen 92% in the same period. The NIFTY Energy Index has also risen 130% in the same period.


This shows that the Company has underperformed in the general market and the power sector.


PGCIL trades at a P/E (TTM) multiple of 11.6x vs 243x for Adani Transmission, 52x for Tata Power & 20x for Torrent Power.

In terms of EV/EBITDA. PGCIL trades at 7.7x vs 61x for Adani Transmission, 13.6x for Tata Power & 9.2x for Torrent Power.


The wide difference in valuation is mainly due to the PSU nature of the Company which diminishes its market valuation vs privately-owned competitors. The other main competitors are also involved in other businesses of power generation and power distribution which impacts their valuation.


At the current valuation, the stock appears to be cheap vs competitors. Given its potential, it is a good stock for long-term investors to evaluate especially with a dividend yield of 4.25%.


4. What are the risks to the investment analysis?


Risks to the analysis are:

  • PSU Company - Company must always follow the government’s directives even if they are against shareholder interest

  • A lot of the company’s legacy assets are very outdated and direly need modernization or rehaul

  • Most of the company’s revenues come from state power utility players and Discoms which have weak credit risk profiles. Any default or delay in settlements from these customers can be very harmful to the company. However, the central government deducts the charges of utility players like NPTC and PGCIL out of the payment due from the central government to the state governments

 

About the Author


I have over 6 years of experience in the Investment sector and have been an active prop trader in European Bond Futures in the past. Currently I am working as head of Research at Smart Sync Services where we are working on simplifying and expanding financial and investment knowledge to make the investment world as accessible for everyday investors as much as possible.


I graduated from the Master of Finance Program from Cambridge University in 2016 after completing my Bachelor of Engineering program from Jadavpur University, Kolkata in 2011.


I am an insignificant public investor & have avid interest in following emerging trends both in technology and other fast evolving sectors. I am also a lifelong learner and relish the chance to learn something new all the time.


Disclosure


I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.

0 comments

Related Posts

See All