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Stock To Buy: Sharekhan Sees 26% Potential Upside To This Large Cap PSU Navratna Stock

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Sharekhan has recommended 'buy' the stock of Power Grid Corporation of India Ltd for a target price of Rs 265 apiece. Power Grid Corporation is a power sector PSU navratna company. It is a large-cap company having a market cap of Rs 1,47,042 crore.

 

The brokerage sees a potential upside of around 26% in 12 months if the stock is purchased at the current market price (CMP).

Power ministry's rejection of REC takeover by Power Grid has removed a key overhang of capital allocation (estimated at Rs. ~Rs. 12,972 crore based on REC's current market capitalization) in the unrelated business of power finance. With robust works in hand worth Rs. 52,000 crore and ISTS opportunity of Rs. 124,148 crore over FY23-27 is expected to drive up Power Grid's transmission capex from FY2024 and improve earnings growth outlook.

Stock Outlook & Returns

Stock Outlook & Returns

The current market price (CMP) of the stock stood at Rs 210.80 apiece on NSE. Its 52 week low level is Rs 180.30 recorded on 12 November 2021, and the 52 week high level is Rs 248.35 recorded on 10 May 2022, respectively.
 
The stock surged 4.95% in a week, whereas, i the past 1 month fallen 5.98%. Over the past 1 year, it has given 9.88% positive returns and 41.17% in the past 3 years. The stock over the past 5 years, gave 36.34% positive return. 

 

RE capacity expansion to drive core transmission business
 

RE capacity expansion to drive core transmission business

The government's aim to expand India's renewable power capacity to ~500GW by 2030 (versus only 163 GW currently) will help Power Grid in playing a pivotal role for grid integration of various renewable energy zones in India by implementing high-capacity Green Energy Corridors. This would increase capex in transmission projects and generate new bids. The long-term growth outlook for the company is strong as the total work in hand for Q1FY23 was Rs. 52,000 crore versus Rs. 35,100 crore in Q1FY22. The CTUIL rolling plan envisages robust investment upto Rs. 1,24,148 crore in the ISTS over FY23-27. The management gave muted capex plan of Rs. 8,000 crore for FY23 but we expect strong pickup in capex spends from FY24 given large investment opportunity in power transmission led by capex for augment RE capacity. 

Focus on non-transmission opportunities

Focus on non-transmission opportunities

To help diversify earnings and create long-term value: Power Grid has established a wholly owned subsidiary Power Grid Energy Services Limited to explore various non-transmission business opportunities like energy management, smart meters, smart grid, energy storage. The initiative in smart metering is gaining traction and the company has initiated procurement process for 1 crore smart meters to provide end-to-end solutions and signed an MoU with MGVCL & UGVCL, Gujarat state discoms to implement Advanced Metering Infrastructure (AMI) System for 66 lakh meters. 

 

REC takeover overhang ends; strong case for sustained high dividend payouts

REC takeover overhang ends; strong case for sustained high dividend payouts

Recently media reports indicated that Power Ministry has rejected a proposal wherein Power Grid Corporation was to buy Power Finance Corporation's (PFC) 52.6% stake in REC Limited. This has removed an overhang on Power Grid as the acquisition would have required Power Grid to pay ~Rs. 13,013 crore (based on REC's current market capitalization) in unrelated business of power finance. This coupled with the FY23 asset monetization target of Rs. 6,600 crore makes strong case for sustained higher dividend payout (Power Grid has consistently increase dividend payout to 60% in FY22 versus only 36% in FY18) and dividend yield of 6-7%.

 Sharekhan Maintain Buy on Power Grid with an unchanged PT of Rs. 265

Sharekhan Maintain Buy on Power Grid with an unchanged PT of Rs. 265

Power Grid has a robust project pipeline worth Rs. 26,000 crore (excluding the Leh-Kaithal project worth Rs. 26,000 crore) and has capitalised ~Rs. 20,695 crore in FY22, which provides earnings visibility for 2-3 years. "We thus expect an 11% CAGR in PAT over FY2022-FY2024E and RoE of ~19% in FY24E. We maintain a Buy on Power Grid with an unchanged PT of Rs. 265, as valuation of 1.6x FY24E P/BV seems attractive considering decent growth outlook, healthy RoE and dividend yield of ~6-7%. Further, monetisation of transmission assets could help improve dividend payout given low FY23 capex guidance of Rs. 8,000 crore," the brokerage has said.

According to the brokerage, the Key Risks are: 1) Slower-than-expected capitalisation of projects and 2) Inability to win new projects under tariff-based competitive bidding route.

Disclaimer

Disclaimer

The stock has been picked from the brokerage report of Sharekhan. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.

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