Power Grid Corp – BUY

Analyst Meet

12 August 2021

Exploring new juncture! Company update

Power Grid’s (PGCIL) 1QFY22 standalone PAT was up 208% YoY, CMP Rs176 Price performance (%)
as it booked Rs32bn gains from transferring 74% stake in 5 TBCB 1M 3M 1Y
12-mth TP (Rs) 210 (19%)
projects to InvIT; even excluding those gains, performance was
Absolute (Rs) 2.1 5.3 33.0
good (project completion of Rs44bn). Going ahead, apart from Market cap (US$m) 24,786
scaling up its core business, PGCIL plans to -1) recycle Absolute (US$) 2.4 3.7 42.8
Enterprise value(US$m) 35,446
Rs78bn/Rs150bn assets into INVIT in FY23/24ii; modalities are Rel. to Sensex (2.0) (6.7) (9.2)
Bloomberg PWGR IN
being worked out; 2) diversify by offering smart metering Cagr (%) 3 yrs 5 yrs
solutions to SEBs/ energy storage, etc; 3) maintain/enhance Sector Utilities EPS 12.6 16.6
payout ratio. We maintain 8% /6% standalone/ consolidated
earnings cagr through FY21-23ii. Valuations are compelling; BUY. Shareholding pattern (%) Stock performance
Govt. of India 51.3 Vol('000, LHS) Price (Rs., RHS)
Good performance: PGCIL’s 1QFY22 PAT growth of 208% YoY was
Pledged (as % of promoter share) 0.0
driven by project execution (Rs44bn vs Rs12bn YoY) and gains of Rs32bn 200,000 200
from transfer of stake in TBCB projects to InvIT. The numbers are not FII 25.3
150,000 150
strictly comparable- in 1QFY21, PGCIL had offered Rs11bn rebates to DII 18.3
100,000 100
SEBs, while in 1QFY22, due to lower - rate of surcharge (12% vs 15%) 52Wk High/Low (Rs) 189/116
50,000 50
and receivables from SEBs (Atmanirbhar scheme), there has been 20% Shares o/s (m) 6975
YoY fall in other income. PGCIL’s consolidated PAT was up 196% YoY; the Daily volume (US$ m) 33.3 0 0

Dec-19

Dec-20
Jun-20

Jun-21
Aug-19
Oct-19

Aug-20

Aug-21
Oct-20
Feb-20
Apr-20

Feb-21
Apr-21
total contribution from SPVs remained flat YoY at Rs680mn, despite of Dividend yield FY22ii (%) 9.2
transferring 5 high contributing assets to InvIT. Free float (%) 48.7
Improving growth outlook: During the analyst meet, PGCIL’s CMD Financial summary (Rs m)
stated that: 1) outlook on core transmission business is improving, as Y/e 31 Mar, Parent FY19A FY20A FY21ii FY22ii FY23ii
India rapidly targets to scale up RE projects; the pipeline remains healthy
Revenues (Rs m) 315,923 378,689 380,645 407,997 424,542
at Rs550-600bn (Leh-ladakh, Gujarat and Rajasthan RE park lines etc); 2)
Ebitda margins (%) 84.7 87.4 87.9 86.4 86.0
it would spend Rs75bn capex in FY22, and complete at least Rs150-160bn
Pre-exceptional PAT (Rs m) 99,386 108,112 119,358 167,218 140,002
projects on its own and subsidiaries; 3) it is working out modalities to
recycle Rs78bn/Rs150bn TBCB projects into INVIT in FY23/FY24 Reported PAT (Rs m) 99,386 108,112 119,358 167,218 140,002
respectively; 4) it will offer smart metering / related services to SEBs and Pre-exceptional EPS (Rs) 14.2 15.5 17.1 24.0 20.1
ensure that there is no dilution to effective returns; 5) dividend pay-out to Growth (%) 20.6 8.8 10.4 40.1 (16.3)
be maintained (gains on stake sale to InvIT will be distributed in 2H). PER (x) 12.4 11.4 10.3 7.4 8.8
ROE (%) 15.8 14.9 15.2 19.9 15.6
Top Pick: We maintain PGCIL’s standalone/consolidated PAT growth of
Net debt/equity (x) 2.4 2.2 1.8 1.5 1.3
8%/6% pa through FY21-23ii, backed by progressive completion of
projects and stable regulations. Excluding the one-time gain from stake EV/Ebitda (x) 9.9 8.0 7.4 6.8 6.2
sale to Invit, the dividend yield on FY22/23ii is 6.7%/6.9% respectively, Price/book (x) 2.1 1.9 1.8 1.6 1.5
which offers fundamental support to the stock price. As such on FY22ii OCF/Ebitda (x) 0.6 0.9 1.0 1.0 0.9
valuation at 7.4x P/E is compelling; rising over dues from SEBs (Rs33bn in Source: Company, IIFL Research. Priced as on 11 August 2021
1QFY22 vs. 19bn QoQ) is a generic risk.
Harshvardhan Dole | harsh.dole@iiflcap.com Akshay Falgunia | akshay.falgunia@iiflcap.com |
91 22 4646 4660 91 22 4646 4642
 Power Grid Corp – BUY

Powergrid Overview

h ar sh .d ol e @i i fl cap. c om 2
 Power Grid Corp – BUY

Figure 1: Pat growth of 208% YoY led by gains from stake sale Figure 4: Capitalisation to remain at Rs15-16bn pa in the next few years
(Rs. m) 1QFY21 4QFY21 1QFY22 % YoY % QoQ (Rs bn) Project Capitalisation
Project Capitalisation 11,840 69,830 44,390 275% -36% 120
Net Sales 83,078 95,760 102,946 24% 8% 100
Personnel Costs 4,861 6,521 5,183 7% -21%
80
Other overheads 6,255 5,432 6,860 10% 26%
60
EBITDA 71,962 83,807 90,904 26% 8%
EBITDA Margin 86.6% 87.5% 88.3% 40
Depreciation 27,970 30,253 30,267 8% 0% 20
Interest 22,786 19,763 22,976 1% 16% -
Other income 6,314 7,630 5,088 -19% -33%

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22
PBT 27,520 41,421 42,749 55% 3%
Tax 7,731 6,265 13,590 76% 117%
Adjusted PAT 19,789 35,156 29,158 47% -17% Source: Company, IIFL Research
Adj. PAT Margin 24% 37% 28% nd
Figure 5: Overdues increased due to COVID 2 wave
Extra ordinary expense/(income) - - (31,696)
Reported PAT 19,789 35,156 60,854 208% 73% Debtors > 45 days (Rs m)
70,000
Rep. PAT Margin 24% 37% 59%
Source: Company, IIFL Research 60,000
50,000
Figure 2: Transmission business revenue share was 97%
40,000
Revenue Breakup (Rs. m) 1QFY21 4QFY21 1QFY22 % YoY % QoQ
30,000
Transmission 90,450 97,870 96,862 7% -1%
20,000
Consultancy 985 1,766 1,524 55% -14%
10,000
Telecom 1,876 1,986 1,188 -37% -40%
0
Total 93,311 101,622 99,575 7% -2%

1QFY20*

2QFY20*

3QFY20*

4QFY20*

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22
4QFY18

1QFY19

2QFY19

3QFY19

4QFY19
Source: Company, IIFL Research
Figure 3: Telecom PBIT drop due to one-time rebate of Rs860mn
PBIT Breakup (Rs m) 1QFY21 4QFY21 1QFY22 % YoY % QoQ Source: Company, IIFL Research
Transmission 57,671 53,123 62,448 8% 18%
Consultancy 157 771 657 318% -15%
Telecom 999 906 268 -73% -70%
Total 58,828 54,801 63,373 8% 16%
Source: Company, IIFL Research

h ar sh .d ol e @i i fl cap. c om 3
 Power Grid Corp – BUY

Figure 6: Operational achievements during the quarter Figure 8: Plant availability above threshold

Source: Company

Source: Company Figure 9: High tripping is due to cyclone in Western and Eastern India

Figure 7: New opportunities in telecom business

Source: Company

Source: Company

h ar sh .d ol e @i i fl cap. c om 4
 Power Grid Corp – BUY

Key takeaways from analyst meet • PGCIL is planning to incur capex for smart metering/network
strengthening such that returns on equitiy would not be less than
14%. It will also participate in competitive tender which will be
Operational Highlights
issued by states in this field.

• PGCIL booked income of Rs32bn from the sale of stakes in 5 TBCB

• Next round of asset monetisation is to happen in FY23 with projects
project transferred to InvIT, against corresponding book value of
size of Rs70-75bn and then Rs150bn pa through FY24-25. The mode
Rs9bn. This income will be subject to tax of Rs3.5bn.
of the monetisation is yet not final and will get clear in upcoming
national monetisation pipeline.
• Adjusting for gains from InvIT and Rebate given to SEBs during last
year, the standalone PAT grew by 7% YoY and consolidated PAT
• PGCIL has total o/s orderbook of Rs351bn, of which Rs168bn are
grew by 6% YoY.
TBCB projects, Rs147bn are ongoing RTM projects and Rs36bn are
new projects. There are potential opportunities of inter-state TBCB
• Standalone other income declined by 19% YoY due to reduction in
projects worth of Rs93bn and Rs15bn on intra-state level.
surcharge income led by higher realisations and lower rate of
surcharge. Total Surcharge income during 1QFY22 was Rs0.6bn vs.
• The total capex would be in the range of Rs75-80bn pa. over next
2.65bn YoY.
few years and capitalisation would be in the range of Rs15-16bn pa.

• Over-dues position during 1QFY22 was better compared to that in

• The upcoming large projects over next few years are evacuation of
1QFY21. Over-dues >45 days was halved to Rs33.3bn and overall
power from large scale RE projects at Leh-ladakh, Bhadla in Gujarat
debtors declined by 14% YoY to Rs71bn. Collection efficiency during
and Rajasthan. The cumulative size of these projects would be in the
July’21 improved to 130% from 90% in June’21.
range of Rs400-450bn.

• Earnings of Telecom business was impacted mainly due to rebate

• PGCIL has submitted DPR of Leh-ladakh project to Power ministry;
expense of Rs860mn booked against settlement towards BSNL
the project is certainly expected to be awarded on RTM basis to the
claim.
company. PGCIL has also incorporated large storage facility in DPR
to boost the power supply in that region.
Outlook
• The funds freed up from recent transfer of TBCB assets to InvIT will
• The Union cabinet released a power distribution reform scheme be utilised for the current year capex and gains are expected to get
worth of Rs3trillion. Where half of budget would go towards network distributed in form of interim dividends in 2HFY22.
strengthening, half would be allocated for smart metering. PGCIL is
exploring opportunities to work along with states and offer technical
support through its in-house teams and financial support in the form
of equity.

h ar sh .d ol e @i i fl cap. c om 5
 Power Grid Corp – BUY

Figure 10: FY22 Capitalisation on standalone basis expected to be Rs100bn Figure 12: PGCIL- attractive dividend yield of 7%

Capitalization (Rs bn)- LHS PAT (Rs bn)- RHS Dividend yield - FY22ii

300 150 8%
7%
130 6%
250
5%
110 4%
200 3%
90 2%
150 1%
70 0%

NHPC

TPW
PGCIL*

TPWR
CESC
NTPC
100 50

50 30
Source: Company *does not include one-time dividend from sale of stake to InvIT
FY21ii

FY22ii

FY23ii
FY18

FY19

FY20

Figure 13: Comparable valuation

Source: Company
EPS
Company M-cap P/E (x) P/B (x) ROE DY Reco Target Price
CAGR
Figure 11: Consolidated profit to grow at 5% cagr over FY21-23ii
FY21-
(US$ m) FY22ii FY22ii FY22ii FY22ii (Rs/share)
Consolidated PAT (Rs bn) 23ii
CESC 1,351 11.5% 6.8 0.9 14.3% 6.1% BUY 1000
140
NHPC 3,545 1.9% 7.8 0.8 10.0% 6.3% ADD 28
120 NTPC 15,295 5.2% 7.4 0.9 12.4% 6.7% BUY 145
100 PGCIL 16,565 8.2% 9.1 1.6 16.1% 6.6% BUY 210
80 TPWR 5,585 20.0% 28.3 2.0 7.5% 0.6% BUY 141
60 TPW 2,959 8.7% 17.0 2.0 12.2% 2.3% ADD 510
Source: Company
40
20
0
FY21ii

FY22ii

FY23ii
FY18

FY19

FY20

Source: Company

h ar sh .d ol e @i i fl cap. c om 6
 Company snapshot Power Grid Corp – BUY

Background: PGCIL is India’s Central Transmission Utility (CTU) owned by the Government of India (57.9% stake). It was set up in 1989 to establish
and operate a regional and national high-voltage transmission network in India. Since inception, PGCIL has consistently shown good project execution
and it enhanced the capacity of the national grid. PGCIL owns and operates one of the largest transmission networks spanning over 125,000 circuit kms,
second only to the Grid Corporation of China. As at end FY16, it had an inter-state power transmission capacity of 59GW. Currently, it carries >40% of
India’s total generated electricity. Further, PGCIL has two other operating businesses, telecom and consulting, which contribute less than 5% in its
revenue and profit.

Management
Capitalisation (Rs bn) Capex (Rs bn)
Name Designation
350 318 300
K Sreekant CMD 284 274
300
250
M Taj Mukarrum Director (Finance) 250 218 215
207
200 172 159 170 200
R K Chauhan Director (Projects)
150 130 150
100 71
100
50 29
50
-

FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
-

FY14

FY20
FY10
FY11
FY12
FY13

FY15
FY16
FY17
FY18
FY19

FY21
Assumptions PE Chart EV/Ebitda
Y/e 31 Mar, Parent FY19A FY20A FY21ii FY22ii FY23ii 12m fwd EV/EBITDA Avg +/- 1SD
12m fwd PE Avg +/- 1SD
Capitalisation (Rs bn) 206.9 170.5 214.7 100.0 100.0
Line Availability (%) 99.8 99.8 99.8 99.8 99.8 15.0 15.0
Tax Rate for grossing RoE 21.0 17.0 17.0 21.0 21.0 (x) (x)
13.0 13.0
(%)
Source: Company data, IIFL Research 11.0 11.0
9.0 9.0
7.0 7.0
5.0 5.0
3.0 3.0
Apr-10 Jul-12 Oct-14 Jan-17 Apr-19 Aug-21 Apr-10 Jul-12 Oct-14 Jan-17 Apr-19 Aug-21

h ar sh .d ol e @i i fl cap. c om 7
 Power Grid Corp – BUY

Financial summary
Income statement summary (Rs m) Balance sheet summary (Rs m)
Y/e 31 Mar, Parent FY19A FY20A FY21ii FY22ii FY23ii Y/e 31 Mar, Parent FY19A FY20A FY21ii FY22ii FY23ii
Revenues 315,923 378,689 380,645 407,997 424,542 Cash & cash equivalents 44,955 55,580 54,370 64,728 68,262
Ebitda 267,553 330,851 334,548 352,642 365,045 Inventories 12,263 14,006 13,628 14,522 15,110
Depreciation and amortisation (102,007) (110,732) (117,117) (119,757) (122,397) Receivables 110,904 98,679 86,213 82,683 77,428
Ebit 165,546 220,119 217,431 232,886 242,648 Other current assets 177,002 209,032 196,655 209,557 218,043
Non-operating income 14,990 21,324 28,615 26,472 25,179 Creditors 42,121 44,856 43,334 43,961 43,551
Financial expense (90,914) (98,136) (85,010) (87,810) (90,610) Other current liabilities 270,644 288,214 278,436 282,466 279,832
PBT 89,621 143,308 161,036 171,548 177,218 Net current assets 32,359 44,226 29,097 45,063 55,460
Exceptionals 0 0 0 0 0 Fixed assets 1,638,600 1,698,365 1,769,435 1,769,018 1,746,621
Reported PBT 89,621 143,308 161,036 171,548 177,218 Intangibles 0 0 0 0 0
Tax expense 9,764 (35,196) (30,891) (36,025) (37,216) Investments 134,655 163,839 145,760 145,760 145,760
PAT 99,386 108,112 130,144 135,523 140,002 Other long-term assets 346,351 315,996 179,715 135,141 95,141
Minorities, Associates etc. 0 0 (10,786) 31,696 0 Total net assets 2,151,965 2,222,427 2,124,007 2,094,982 2,042,983
Attributable PAT 99,386 108,112 119,358 167,218 140,002 Borrowings 1,460,864 1,464,211 1,308,800 1,225,566 1,117,566
Other long-term liabilities 100,930 113,819 119,419 119,419 119,419
Ratio analysis Shareholders equity 590,171 644,397 695,788 749,997 805,998
Y/e 31 Mar, Parent FY19A FY20A FY21ii FY22ii FY23ii Total liabilities 2,151,965 2,222,427 2,124,007 2,094,982 2,042,983
Per share data (Rs)
Pre-exceptional EPS 14.2 15.5 17.1 24.0 20.1 Cash flow summary (Rs m)
DPS 8.3 10.0 12.0 16.2 12.0 Y/e 31 Mar, Parent FY19A FY20A FY21ii FY22ii FY23ii
BVPS 84.6 92.4 99.7 107.5 115.5 Ebit 165,546 220,119 217,431 232,886 242,648
Growth ratios (%) Tax paid (24,894) (22,307) (25,291) (36,025) (37,216)
Revenues 5.4 19.9 0.5 7.2 4.1 Depreciation and amortization 102,007 110,732 117,117 119,757 122,397
Ebitda 2.3 23.7 1.1 5.4 3.5 Net working capital change (93,490) (1,242) 13,920 (5,608) (6,863)
EPS 20.6 8.8 10.4 40.1 (16.3) Other operating items 0 0 0 31,696 0
Profitability ratios (%) Operating cash flow before interest 149,168 307,302 323,176 342,706 320,966
Ebitda margin 84.7 87.4 87.9 86.4 86.0 Financial expense (90,914) (98,136) (85,010) (87,810) (90,610)
Ebit margin 52.4 58.1 57.1 57.1 57.2 Non-operating income 14,990 21,324 28,615 26,472 25,179
Tax rate (10.9) 24.6 19.2 21.0 21.0 Operating cash flow after interest 73,244 230,490 266,781 281,368 255,535
Net profit margin 31.5 28.5 34.2 33.2 33.0 Capital expenditure (225,360) (142,007) (59,049) (74,766) (60,000)
Return ratios (%) Long-term investments (36,042) (29,184) 18,080 0 0
ROE 15.8 14.9 15.2 19.9 15.6 Others 130,717 31,893 12,096 0 0
ROCE 9.0 11.0 11.3 12.3 12.9 Free cash flow (57,441) 91,192 237,907 206,602 195,535
Solvency ratios (x) Equity raising 0 0 0 0 0
Net debt-equity 2.4 2.2 1.8 1.5 1.3 Borrowings 148,734 3,348 (155,411) (83,234) (108,000)
Net debt to Ebitda 5.3 4.3 3.7 3.3 2.9 Dividend (69,901) (83,915) (83,705) (113,010) (84,001)
Interest coverage 1.8 2.2 2.6 2.7 2.7 Net chg in cash and equivalents 21,392 10,625 (1,210) 10,358 3,534
Source: Company data, IIFL Research Source: Company data, IIFL Research

h ar sh .d ol e @i i fl cap. c om 8
 Power Grid Corp – BUY

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h ar sh .d ol e @i i fl cap. c om 9
 Power Grid Corp – BUY

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financial interest in the securities of any of the companies that the analysts cover. In addition, company its employees from conducting Futures & Options transactions or holding any shares for a period of less than 30
days.
Past performance should not be taken as an indication or guarantee of performance, and no or warranty, express performance. estimates contained in this report reflect a judgment of its original date of publication by
IIFL and are subject to change of mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate may adverse on the price of such securities
or financial instruments.

Analyst Certification: (a) that the views expressed in the research report accurately reflect part of her compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained
in the research report.

A graph of daily closing prices of securities is available at http://www.nseindia.com/ChartApp/install/charts/mainpage.jsp, www.bseindia.com and http://economictimes.indiatimes.com/markets/stocks/stock-quotes.
(Choose a company from the list on the browser and select the “three years” period in the price chart).

Name, Qualification and Certification of Research Analyst: Harshvardhan Dole(B.Tech, PGBDA), Akshay Falgunia(Chartered Accountant)

IIFL Securities Limited (Formerly ‘India Infoline Limited’), CIN No.: L99999MH1996PLC132983, Corporate Office – IIFL Centre, Kamala City, Senapati Bapat Marg, Lower Parel, Mumbai – 400013 Tel: (91-
22) 4249 9000 .Fax: (91-22) 40609049, Regd. Office – IIFL House, Sun Infotech Park, Road No. 16V, Plot No. B-23, MIDC, Thane Industrial Area, Wagle Estate, Thane – 400604 Tel: (91-22) 25806650. Fax: (91-22)
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Key to our recommendation structure

BUY - Stock expected to give a return 10%+ more than average return on a debt instrument over a 1-year horizon.

SELL - Stock expected to give a return 10%+ below the average return on a debt instrument over a 1-year horizon.

Add - Stock expected to give a return 0-10% over the average return on a debt instrument over a 1-year horizon.

Reduce - Stock expected to give a return 0-10% below the average return on a debt instrument over a 1-year horizon.

Distribution of Ratings: Out of 246 stocks rated in the IIFL coverage universe, 127 have BUY ratings, 9 have SELL ratings, 85 have ADD ratings and 23 have REDUCE ratings

Price Target: Unless otherwise stated in the text of this report, target prices in this report are based on either a discounted cash flow valuation or comparison of valuation ratios with companies seen by the analyst as
comparable or a combination of the two methods. The result of this fundamental valuation is adjusted to reflect the analyst’s views on the likely course of investor sentiment. Whichever valuation method is used there
is a significant risk that the target price will not be achieved within the expected timeframe. Risk factors include unforeseen changes in competitive pressures or in the level of demand for the company’s products. Such
demand variations may result from changes in technology, in the overall level of economic activity or, in some cases, in fashion. Valuations may also be affected by changes in taxation, in exchange rates and, in
certain industries, in regulations. Investment in overseas markets and instruments such as ADRs can result in increased risk from factors such as exchange rates, exchange controls, taxation, and political and social
conditions. This discussion of valuation methods and risk factors is not comprehensive – further information is available upon request.

h ar sh .d ol e @i i fl cap. c om 10
 Power Grid Corp – BUY

Date Close price Target price Rating

Power Grid Corp: 3 year price and rating history
(Rs) (Rs)
(Rs) Price TP/Reco changed date 21 Jun 2021 233 280 BUY
300 29 Apr 2021 217 260 BUY
250 15 Feb 2021 212 250 BUY
200 23 Jun 2020 179 220 BUY
150 20 Mar 2020 147 201 BUY
01 Feb 2019 189 220 BUY
100
01 Aug 2018 182 245 BUY
50
0
Aug-18

Dec-18

Dec-19

Dec-20

Aug-21
Oct-18

Apr-19

Aug-19
Jun-19

Oct-19

Apr-20

Aug-20

Apr-21
Jun-20

Oct-20

Jun-21
Feb-19

Feb-20

Feb-21

h ar sh .d ol e @i i fl cap. c om 11