Buy This Stock For A 7-8% Dividend Yield And 15% Returns, Says Motilal Oswal

Motilal Oswal is bullish on the stock of Power Grid and sees an upside of 15% on the stock from the current levels and a dividend yield of 7% to 8%. While many stocks are being recommended these days, we suggest investors to be a little cautious at the moment as markets have climbed a great deal. Buy in small quantities as risk to a downside remain.

Power Grid – Dividend Yield of 7% to 8%

According to Motilal Oswal Power Grid has won Rs 90-100 billion of awards during the past 8-9 months, which is a positive sign, given a declining order book.

"The capital expenditure 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 return on equity of 18%. We maintain our Buy rating with a DCF-based target price of Rs 205 per share," the brokerage has said.

Power Grid's standalone net rose 3 times year on year to Rs 60.8 billion due to one-offs related to a Rs 31.7 billion gain from the sale of assets to InvIT and Rs 2.3 billion of income - difference in final and provisional tariff, and Rs 0.8 billion impact of a rebate in 1QFY21," the brokerage has said.

Government distribution reform scheme may help Power Grid

According to Motilal Oswal the company is looking at opportunities ushered by the government's distribution reform schemes. The company sees an incremental Rs 2 trillion of funding/investment needs for power distribution companies for upgrade of their distribution network and Smart Meters. It is looking to engage with power distribution companies for the same and provide technical solutions and investment support.

Power Grid expects capitalization in FY22 to be at Rs 150 billion, with a capital expenditure of Rs 75 billion. For FY23, it expects capitalization to be at Rs 120-150 billion, with a capital expenditure of Rs 75-100 billion, the brokerage has said.

Reasons to buy the stock of Power Grid

According to Motilal Oswal, the management sees Rs 108 billion of upcoming opportunities in inter- and intrastate works. Transmission schemes are being planned in Leh, Gujarat, and Rajasthan, with a total potential cost of Rs 400 billion. DPR for Transmission works at Leh has been prepared and submitted.

"We see additional distribution potential from share in dividends from Special Purpose vehicles of the InvIT, sale of 26% stake in five Special Purpose vehicles, and further transfer of assets to the InvIT.

Given a 7-8% dividend yield, backed by steady earnings growth (5-6% CAGR) and Return On Equity of 18%, Power Grid remains attractively valued at 1.6 times FY22E price to book value. We maintain our Buy rating with a DCF-based price target of Rs 205 per share," the brokerage has said.

Disclaimer

Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage houses are not liable for any losses caused as a result of decisions based on the article.