Buy Power Grid Corporation of India Ltd For Target Rs.375 by Motilal Oswal Financial Services Ltd
Rising capex needs weigh on dividend
* Power Grid (PWGR)’s 3QFY25 reported standalone (SA) PAT was in line at INR38.9b (-2% YoY). On a consolidated basis, reported PAT was down 4% YoY at INR38.6b. In the earnings call: 1) FY25 capex guidance was raised to INR230b (from INR200b), 2) capex and capitalization for FY26 was guided at INR280-300b, while the same for FY27 was guided at INR350b, 3) management guided that the dividend payout may see some moderation given mounting capex. Of the current order book of INR1.43t, ~33% is attributable to RTM projects, where the company earns a healthy 15% ROE.
* Following the 3QFY25 results, we moderate our DPS estimates to INR9/ INR10/ INR13.5 for FY25/FY26/FY27. PWGR has declared a second interim dividend of INR3.25 per share for FY25. We reiterate our BUY rating on the stock with a TP of INR375 based on 3.4x Dec-26 BVPS.
Soft quarter amid higher-than-expected opex
Standalone performance:
* PWGR reported SA revenue of INR101b (-5% YoY) in 3QFY25, 11% below our estimate of INR114b. EBITDA came in at INR85b (-9% YoY), ~14% below our est. of INR99b, hit by a sharp rise in other expenses. The EBITDA miss vs. our estimate was largely attributable to higher other expenses.
* The reported SA PAT was in line with our est. and stood at INR39b, aided by higher other income (partly attributable to the gain on the monetization of the remaining stake in some InvIT assets). Adjusted SA PAT of INR38.5b was flat on a YoY basis, and 3% below our est. of INR39.6b.
* The net movement in regulatory deferral account balances was positive at INR0.4b during the quarter.
Consolidated performance:
* On a consolidated basis, reported PAT came in at INR38.6b (-4% YoY), while EBITDA declined 7% YoY to INR95.8b.
* The transmission segment remained the primary revenue driver, contributing 97.45% of consolidated EBIT at INR65.4b, while the telecom segment contributed 2%, with EBIT of INR1.2b, marking a 101% YoY growth.
* In 3QFY25, its JVs reported a loss of INR51m, significantly improving from INR1,046m loss in 2QFY25.
Key announcements:
* The Board declared a second interim dividend of INR3.25/share for FY25 (Record date: 7th Feb’25).
* Additionally, the Board approved an investment of INR3.7b for the 400kV Vindhyachal PS – Sasan D/C Line at Hindalco Switchyard, scheduled for commissioning by Dec’26.
Highlights of the 3QFY25 performance:
Operational performance and financials
* The company added 1,399ckm of transmission lines and 9,185MVA of transformation capacity.
* The transmission system had an availability rate of 99.8% in 9MFY25, reflecting high operational efficiency.
* For 9MFY25, the reliability rate was 0.24 trippings per line.
* On a standalone basis, the average borrowing cost was 7.54%.
* The telecom division successfully added 12 new customers during the quarter and reported an income of INR2.3b.
Project wins and capex outlook
* PWGR emerged as the L1 bidder in 7 ISTS TBCB projects (levelized tariff of INR20.7b) in 3QFY25.
* On a consol. basis, capex was INR76.4b, and capitalization was INR34b in 3Q.
* The company capitalized INR16.8b on a consolidated basis and INR8.2b on a standalone basis.
* For FY25, management guided capex of INR 230b (RTM: INR 39b, TBCB: INR 142b, Others: INR 48.7b) with capitalization ~INR 180b. For FY26, capex is projected at INR 280-300b and capitalization at INR 250b, with both reaching INR 350b in FY27. Work in hand: INR 1.43t.
Future growth and dividend outlook
* Dividend Outlook: The dividend for FY25 is expected to be INR9/share, lower than the previous period due to the need to allocate funds for capital expenditure.
* Currently, ~INR520b worth of projects are under bidding. Assuming a project win rate of ~50%, ~INR250-270b worth of projects are likely to be won by PWGR, in addition to the current work in hand of INR1.43t. This would take the total value of projects to INR1.7t.
Valuation and view
We derive our TP of INR375 for PWGR based on Dec’26E BVPS and a P/B multiple of 3.4x, which we believe is reasonable given that capex and capitalization are on a multi-year uptrend with the order book at an elevated level.
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