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Profit aided by other income

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 INR35b. Adjusted for one-offs, PAT was up 8% YoY to INR32b, aided by higher other income.

* It bagged INR90-100b 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 INR270/share.

Profit boosted by other income

* PWGR’s reported PAT rose 10.5% YoY to INR35b due to benefit of transmission income related to the prior period (INR4.2b). Adjusted for the same, standalone PAT was up 8% YoY to INR32b (est.: INR30.6b) on account of higher other income. Growth in underlying transmission numbers was muted ~4% YoY (est. 7-8%). Lower core transmission growth was due to annual adjustments related to employee costs, the impact of which was felt in 4QFY21. Employee costs increased by 31% YoY to INR6.5b.

* Other income rose 8% YoY to INR7.6b (est. INR3.8b), despite a high base of last year (4QFY20: +80% YoY). The same was led by higher late payment surcharge income (INR1.5b v/s INR1b in FY20) and higher dividend from its subsidiaries (INR1.5b v/s INR0.8b in FY20).

* Profitability in the Telecom/Consultancy segment declined by 7%/3% YoY to INR0.9b/INR0.3b.

* Capitalization in 4QFY21 stood at INR90b while capex was INR34b. In FY21, capitalization stood at INR215b while capex was INR113b.

* PWGR declared a final dividend of INR3/share, resulting in a payout of INR12/share in FY21. A bonus of 1:3 has been recommended by the board.

* Consolidated reported PAT was up 9% YoY to INR120b in FY21. Adjusted for one-offs, consolidated PAT in FY21 was up 14% YoY at INR125b.

Highlights from the management commentary

* PWGR expects capitalization in FY22 to be INR160-170b. Of this, INR90- 100b would be for RTM projects, with INR60-70b for TBCB. In FY22, overall capex would be INR75b.

* As per PWGR, INR103b 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 INR270-300b. DPR for transmission works at Leh (10GW) has also been prepared.

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

See a strong case for higher payouts; reiterate Buy

* PWGR does see an upward bias towards payouts. While awarding of transmission schemes under renewable integration provides an opportunity for new wins, our checks suggest continued challenges (deferment in their awarding). With a declining order book and capex schedule, we see a strong case for higher dividend in the near term.

* With INR27b of upfront cash from the OFS sale of InvIT, we see the potential of it being distributed to shareholders, implying an additional dividend of INR5/share. This should aid payout ratios (~70%) and translate to a DPS of INR35-36/share over the next two years, implying a dividend yield of 7-8%. A share in dividends from SPVs of the InvIT, sale of 26% stake in five SPVs, and further transfer of assets to the InvIT provides additional distribution potential. Given a 7-8% dividend yield, backed with steady earnings growth (5-6% CAGR) and 18% RoE, PWGR remains attractively valued at 1.6x FY22E P/BV. We maintain Buy with a DCF based TP of INR270/share.

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