PowerGrid: Maintain ‘buy’ with DCF-based TP of Rs 270

Dividend set to rise; maintain ‘buy’: PWGR’s result highlights the benefit of prior period revenue related to transmission income seeping in. Reported standalone PAT was up 10.5% YoY to Rs 35 billion. Adjusted for one-offs, PAT was up 8% YoY to Rs 32 billion, aided by higher other income. It bagged Rs 90-100 billion in awards in recent months, which is a positive sign, given a declining order book. Nevertheless, the capex trajectory is on a decline. With proceeds from InvIT, we see strong scope for higher dividends. Valuations at 1.6x FY22E P/BV and 7-8% dividend yield remains attractive for a company with steady RoEs of 17-18%. We maintain our ‘buy’ rating with a DCF-based TP of Rs 270 per share.

Highlights from the management commentary: Projects in hand: PWGR currently has Rs 410 billion worth of projects in hand. This consists of ongoing works of Rs 170 billion, new projects of Rs 60 billion, and TBCB projects of Rs 180 billion. Receivables: Trade receivables declined to Rs 36 billion and stands at 38 days of billing (v/s Rs 65 billion at the end of 2QFY21; 63 days).

Order pipeline: As per PWGR, Rs 103 billion of upcoming opportunity is present in interstate and intrastate works. In addition, transmission schemes are being planned in Gujarat and Rajasthan, with a total potential cost of Rs 270-300 billion. DPR for transmission works at Leh (10GW) has also been prepared.  Over the next few years, PWGR expects to award interstate TBCB projects of Rs 150-200billion p.a. In line with the government’s vision under NIP, the management expects capex and capitalization to be at Rs 100 billion annually. Capex and capitalisation: PWGR expects capitalisation in FY22 to be Rs 160-170billion. Of this, Rs 90-100 billion would be for RTM projects, with Rs 60-70 billiom for TBCB. In FY22, overall capex would be Rs 75 billion.

InvIT: PWGR expects another INR50b worth of assets to be monetized over the next 12-18 months. Profit of five assets transferred to the InvIT stands at INR3.7b in FY21.

Dividend: The company does expect an upward trajectory in dividends, but will look at distributing payouts that are sustainable.

Valuation and view: Given an under-penetrated market and strong competitive positioning, PWGR is well-positioned to capitalize on upcoming opportunities/awarding. Valuations at 1.6x FY22E P/BV and 7-8% dividend yield remains attractive for a company with steady RoEs of 17-18%. We maintain our Buy rating with a DCF based TP of INR270/share.