[Biswadeep Sarkar, Kolkata] The Indian economy is on a strong footing, with the World Bank projecting GDP growth of 6.3% in FY 2024. The Indian stock market has also performed well, with benchmark indices yielding an 8% return year-to-date (YTD) as of October 6, 2023. In this context, we are publishing our take on Power Grid Corporation of India Ltd (CMP: INR 197.05).
Sector Overview:
The Indian power sector is the world's fifth-largest by generation capacity, with a total installed capacity of over 400 gigawatts. The sector is regulated by the Central Electricity Regulatory Commission (CERC), which sets tariffs for power transmission and distribution. The Indian government is committed to increasing the country's power generation capacity and improving the efficiency of the power sector. In the Union Budget 2023-24, the government announced a power sector package of over Rs. 3 lakh crore to help power discoms clear dues of power generation and transmission companies. This would reduce the power sector's receivables and strengthen companies' balance sheets.
Stock Overview:
Powergrid is India's largest power transmission utility, with over 174,625 circuit kilometers of transmission lines and 499,360 megavolt amperes of transformation capacity. The company transmits about 45% of the total power generated in India. Powergrid also undertakes transmission-related consultancy to more than 150 domestic clients and owns and operates 71,673 kilometers of telecom network.
Financial Analysis:
Powergrid posted muted Q1FY24 results, with revenue up 1.3% year-on-year (YoY) but net profit declining 5.3% YoY. However, the company is expected to benefit from the government's power sector package and the increasing demand for electricity in India. We estimate Powergrid's earnings per share (EPS) to grow at a CAGR of 10% over the next three years.
Based on our projections, we estimate that Powergrid's EPS will be INR 20.1 in FY 2025. This implies a target share price of INR 201, assuming a PE multiple of 10x. This represents a potential upside of only 2% from the current market price. Powergrid is currently trading at a price-to-earnings (PE) ratio of 12x.
However, Powergrid also offers a healthy dividend yield. We estimate that the company will pay a dividend of INR 12 per share in FY 2025, which represents a dividend yield of 6.1% at the current market price.
Investment Recommendation:
We recommend a hold rating on Powergrid at the current market price. Investors who already own the stock can expect a steady dividend above 6%, depending on their purchase price. However, we do not recommend taking a new position in the stock at the current market price.
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