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Strong capitalisation, capex…

About the stock: Power Grid is India’s largest power transmission utility with transmission lines of 170724 ckt km and 454350 MVA of transformation capacity.

* Power Grid transmits about 50% of total power generated in India to its transmission network

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

Q2FY22 Results: PowerGrid reported an in line set of Q2FY22 revenues. As per our expectations, growth rates in the transmission business have settled in the single digit domain given peak of transmission capex is behind us.

* Reported revenues came in at | 9929.2 crore vs. our estimate of | 10028.5 crore, implying growth of 9.6% YoY. However, transmission segment revenues came in at | 9679.6 crore, up 7% However, PAT came in at | 3338.7 crore, below our estimate of | 3471.9 crore as reported other income fell short of our expectations

* Capitalisation of | 13275 crore in H1FY22 with capex of | 3685 crore

What should investors do? Within the power sector, Power Grid has been a steady performer due to strong asset addition in FY16-20. Now with relatively small size 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 | 220 i.e. 1.9x 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. Diversification into smart metering and T&D infrastructure business

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 of | 910/share, (57x FY24E EPS)

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