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Steady as always

* We assume coverage on PWGR with a Buy rating and a TP of Rs250, based on SoTP. PWGR is expected to report a 5% earnings CAGR in the medium term based on its current transmission rolling plan till FY27.

* Higher capex towards renewable energy (RE), intra-state opportunities and smart metering are among the key upside triggers. PWGR has been very successful in tariffbased competitive bidding (TBCB) and has earned better-than-regulated returns on some of these projects.

* At the CMP, PWGR provides ~20% upside, which includes dividend yield of ~6%.

RE addition leading to transmission capex across the globe:

With the share of RE increasing among the sources of energy across the globe, transmission capex is also expected to improve. China, which is expanding its RE capacity at a rapid pace, has seen an uptick in Transmission capex. The addition of more RE capacity will result in more spending on the flexibility and reliability of the system. Further, the installation of RE sources is very specific to locations, hence there will be a need for a better transmission system.

Transmission capex in India looks to have bottomed; more RE will imply growth hereon:

For the past few years, there have been concerns that India might not require much Transmission system, given the addition in the last decade. PWGR’s consolidated capex, after topping in FY19 (Rs260bn), slid to Rs90bn in FY22. Capex in FY23/FY24 is likely to be in the Rs80-100bn range. More recently, we have seen an uptick in both work at hand and opportunities in the TBCB pipeline. From Q1FY22 to Q4FY22, upcoming TBCB projects increased from ~Rs110bn to ~Rs320bn.

CTUIL rolling plan for Transmission:

The present rolling plan of Central Transmission Utility of India Ltd (CTUIL) envisages investments of Rs1.25tn in transmission during FY23- FY27, with the addition of over 200,000 MVA and 31,000 ckm. Under the regulated tariff mechanism (RTM), PWGR has also been given the Rs270bn 5GW Leh-Kaithal Transmission corridor, which will be completed by FY27. Given that the project is of national importance, a considerable Central Government grant is given for it. Since Ladakh is a sensitive area and PWGR has vast experience in the sector, this was awarded to PWGR under RTM

Assume coverage with Buy and TP of Rs250:

From expectations of very low investments in Transmission in the medium term, the tide seems to have turned toward decent investments (Rs1.25tn from FY23- FY27 on Inter-state Transmission) as more RE capacity is added. While PWGR benefits from bagging some RTM orders given the criticality of the projects and vast experience of the company, it is also among the most successful players in the TBCB projects. Though the intensity of Transmission might have come down in the last few years, the medium-term outlook clearly indicates ~5% growth in earnings for PWGR. Our June’23 TP of Rs250 is based on SoTP including ~6% DPS. In the last five years (excluding the Covid period), the one-year forward PB has been in the range of 1.54x (Av-SD) to 1.88x (Av+SD). At the CMP, the stock trades at ~1.7x/1.6x FY24E/FY25E Book. At the CMP, the dividend yield stands at ~6%. We assume coverage with a Buy rating. Key risks: slow finalization of TBCB projects, a lower win ratio in these projects and issues around RoW.

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