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Steady growth in underlying Transmission numbers

Steady growth coupled with higher payouts; maintain Buy

* PWGR’s 1QFY22 result highlights the steady growth in its Transmission business, with underlying numbers increasing 12% YoY. Reported standalone PAT rose 3x YoY, led by gains on sale of assets to the InvIT.

* It has won INR90-100b of awards during the past 8-9 months, which is a positive sign, given a declining order book. The capex trajectory is on a decline, and with proceeds from InvIT, we see strong scope for higher dividends. Valuations at 1.6x FY22E P/BV and a 7-8% FY22E dividend yield remain attractive for a company with a steady RoE of 18%. We maintain our Buy rating with a DCF-based TP of INR205/share.

Profit boosted by sale of assets; underlying numbers see steady growth

* Standalone PAT rose 3x YoY to INR60.8b due to one-offs related to: a) INR31.7b gain from the sale of assets to InvIT, b) INR2.3b of income – difference in final and provisional tariff, and c) INR10.8b impact of a rebate in 1QFY21.

* Adjusted for prior period sales and above one-offs, PAT stood at INR29.6b (in line with our estimate of INR30.2b).

* Other income fell 19% YoY to INR5.1b, amid lower late payment surcharge income and partly offset by higher dividend from subsidiaries and JVs. Late payment surcharge declined to INR0.6b (v/s INR2.65b in 1QFY21). Dividend from subsidiaries and JVs was higher at INR0.7b v/s INR0.2b in 1QFY21.

* Consultancy EBIT rose over 3x to INR0.7b (v/s INR0.2b in 1QFY21).

* Telecom EBIT fell 73% YoY to INR0.3b. Telecom income in 1QFY22 was impacted by INR0.9b due to rebate to BSNL, with respect to revision of contracts pending for the past three years.

* Capitalization/capex at a group level stood at INR56b/INR11b in 1QFY22.

* Consolidated reported PAT grew over 3x YoY to INR59.9b in 1QFY22. Adjusted for the aforementioned one-offs, PAT grew 5% YoY to INR30.3b in 1QFY22.

* Receivables have risen sequentially to INR71b (v/s INR36b at the end of 4QFY21) due to the second COVID wave, leading to lower collections in Apr’21 and May’21.

Key takeaways from the management interaction

* PWGR is looking at opportunities ushered by the government’s distribution reform schemes. The company sees an incremental INR2t of funding/investment needs for DISCOMs for upgrade of their distribution network and Smart Meters. It is looking to engage with DISCOMs for the same and provide technical solutions and investment support.

* PWGR expects capitalization in FY22 to be at INR150b, with a capex of INR75b. For FY23, it expects capitalization to be at INR120-150b, with a capex of INR75-100b.

* The management sees INR108b of upcoming opportunities in inter- and intrastate works. Transmission schemes are being planned in Leh, Gujarat, and Rajasthan, with a total potential cost of INR400b. DPR for Transmission works at Leh has been prepared and submitted.

See a case for higher payouts; reiterate Buy

* PWGR is looking at opportunities within the distribution schemes. However, as discussions with DISCOMs are yet to take place and with no model being decided, we await details on this to emerge. Awarding of Transmission schemes under renewable integration does provide an opportunity for new wins. Our checks suggest continued challenges, which have seen a 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 the benefit of sales to InvIT, we see potential for the proceeds being distributed to shareholders. This should aid payout ratios (60-70%) and translate to a DPS of INR26-27/share over the next two years, implying a dividend yield of 7-8%. We see additional distribution potential from: a) share in dividends from SPVs of the InvIT, b) sale of 26% stake in five SPVs, and c) further transfer of assets to the InvIT. Given a 7-8% dividend yield, backed by steady earnings growth (5-6% CAGR) and RoEs of 18%, PWGR remains attractively valued at 1.6x FY22E P/BV. We maintain our Buy rating with a DCF-based TP of INR205/share.

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