1:3 Bonus, 112.50% Dividend FY24: BUY Low-Cost Maharatna PSU Power Stock; Goldman Says BUY, Rs 370/TP

Maharatna PSU energy giant, Power Grid has emerged as a top pick after the Indian government upgraded transmission capex estimates to $110 billion, which is in line with Goldman Sachs' forecast as well. The global brokerage believes that Power Grid would potentially capture the bulk of the upcoming transmission capex opportunity. Backed by its large balance sheets with low-cost debt, the stock is attractive.

On BSE, Power Grid's share price ended at Rs 350.85 apiece, with a market cap of Rs 350.85 crore. The stock is nearing its 52-week high of Rs 366.20 apiece.

The stock's price-to-equity ratio is at 21.27x, while the return on equity is about 17.66%.

Talking about the government's latest upgrade in transmission capex, Goldman in its report, highlighted that the government's transmission planning approach evolved to factor: 1) higher transmission intensity of renewables, and 2) emerging non-utility demand/supply centres like Green Hydrogen / Green Ammonia, Pumped Storage Projects and direct central grid connectivity for industrial load.

With the plan in place, Goldman expects the transmission capex cycle to inflect the lengthening timelines for grid connectivity of new renewable projects in certain areas.

Why BUY Power Grid Shares?

Goldman expects the Maharatna giant to be the largest beneficiary of its US$500bn+ grid TAM estimate between FY24-50E, given its large balance sheet, low cost of debt and strong annual free cash generation.

Also, the company is likely to benefit from being eligible for direct nomination to execute large, complicated, multi-region projects.

Rising renewable penetration, strong demand growth and broader electrification of the energy mix have helped kickstart PGCIL's capex upgrade cycle, in Goldman's opinion. In addition to the increase in the FY25E capex target twice, management has guided the FY26E/27E capex to be more than Rs250bn/Rs300bn - already touching the peak of the previous cycle.

Notably, the broker's note also pointed out that work-in-hand, an indicator of the cumulative capex over the next 3-5 years, has more than doubled over the last 12 months with PGCIL winning 70% market share in auctions and being allocated projects worth Rs130bn for 1GW offshore wind power evacuation.

Hence, on the valuation, Goldman's note said, " Our 12m-SoTP based TP of Rs370/sh, implies P/BV of 3.5x (on 1HFY27E base), justified by large TAM expected to begin materialising soon, low cost of capital along with the optionality of re-leveraging balance sheet for funding growth."

Among the key risks, as per the brokerage, are -- delay / slower than expected pick up in transmission project awards, rise in competitive intensity/cost of debt hampering TBCB project IRRs and shortage of transmission equipment affecting project execution.

In FY24, Power Grid carried bonus issues and dividends. In September last year, Power Grid delivered bonus issues in the ratio of 1:3. Notably, the company delivered two bonus shares since July 2021. The first bonus was also of a 1:3 ratio in 2021.

About Power Grid:

POWERGRID is mainly engaged in the business of transmission of power through its EHVAC/HVDC transmission network. The company has diversified into telecom business by leveraging its Pan India transmission network through stringing of optical ground wire(OPGW).POWERGRID has provided/providing consultancy services to domestic and international clients by leveraging its capability and experience in the field of power transmission, sub transmission, distribution management, load dispatch & communication etc.