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Steady performance…

About the stock: Powergrid is India’s largest power transmission utility with transmission lines of 169273 ckt km and 443815 MVA of transformation capacity.

* Powergrid transmits about 50% of the total power generated in India on its transmission network

* It also undertakes transmission related consultancy to more than 150 domestic clients and owns & operates 71673 km of telecom network.

Q1FY22 Results: Powergrid reported a steady set of numbers wherein core transmission segment income grew marginally ahead of estimates.

* Reported revenues came in at | 9776 crore vs. our estimate of | 9886.9 crore. However, transmission segment revenues came in at | 9686.2 crore, up 7% YoY (vs. our estimate of | 9587.7 crore). Revenues from telecom, consultancy segment came in at | 118.8 crore, | 152.4 crore, respectively

* PAT of | 6085.4 crore optically looks very high as there was an exceptional gain of ~| 3170 crore on account of gain on sale of stake in five transmission assets that were transferred to the InvIT.

What should investors do?

Within the power sector, Powergrid has been a steady performer on account of strong asset addition in FY16-20. Now with relatively small sizes of renewable projects growth rate will taper down for the stock, which will be cushioned by a decent dividend yield.

* Maintain Buy rating on the stock

Target Price and Valuation: We value the stock at | 186 i.e. 1.8x FY23E Book Value.

Key triggers for future price performance:

* Higher than expected IRRs in the competitively bid tariff based competitive bids projects can rerate the stock

Alternate Stock Idea: In the power space, we are bullish on IEX’ prospects

* Dominating market share, strong traction in new products and strong opportunity landscape

* BUY with a target price of | 530 per share, valued at 50x FY23E EPS.

Key takeaways of recent quarter & conference call highlights

Conference call highlights

* The company capitalised assets to the tune of | 4439 crore and | 5642 crore on a standalone and consolidated basis, respectively

* The capex incurred during Q1FY22 was at | 706 crore on a standalone basis, For FY22, the company expects to a capex of | 15000 crore

* Gross block as of Q1FY22 was at | 247421 crore while debt was at | 140000 crore

* Total business opportunity was at | 39000 crore worth of projects, which will come up for bidding

* Overdues >45 days were at | 3333 crore vs. | 6145 crore in Q1YF21

* Standalone and consolidated CWIP were at | 14803 crore and | 21000 crore, respectively

* Equity invested in operational TBCB projects was at | 2592 crore whereas the same for under construction projects was at | 655 crore

* For FY23, the company expects | 7000-7500 crore worth of TBCB projects to be transferred to the InVIT whereas the same will be | 15000 crore by FY24-25 each

* The company plans to foray into the smart metering infra business where it will invest in the smart meter asset development business as floated by the respective state utility. The threshold RoE on such business will not be less than 14%.

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