Power grid - a superior alternative to Invits

Stock Opportunities
#6

@harsh.beria93

I did some research on PowerGrid and had the following questions for which I couldn’t find the answer in AR. If you have the insights, please do let me know

  1. Who is the customer for PowerGrid? Who pays the transmission charges? Is it the Power Producers or Discoms?

  2. What is inventory for PowerGrid? I see an amount of Rs1400 Crores in AR for FY 2019-20 as Inventory Assets. Can’t understand what inventory will be there due to transmission or consultancy.

  3. I see Adani Transmission as a major competitor to PowerGrid. However, in all financial aspects (EPS, Debt-Equity, RoA, RoE, RoCE), Adani is lagging PowerGrid. But still, Adani Transmission commands a PE and PB of 37 and 6 while PowerGrid has 7 and 3 respectively. So,

    1.Why is the private player not as competitive as the CPSE?
    2. Why is the private player commanding such premium with worse financials?

  4. Are there any other sizeable competitors to PowerGrid? I believe no other public player (NTPC or NHPC) is involved in transmission.

1 Like
#7

Its discoms. Here is an excerpt from the latest Crisil rating report

image
image2404×474 135 KB

https://www.crisil.com/mnt/winshare/Ratings/RatingList/RatingDocs/Power_Grid_Corporation_of_India_Limited_June_05_2020_RR.html

About inventory, maybe an accountant will be more qualified to answer it. What is more important is the cash conversion days over time.

image
image3468×300 68.9 KB

About competition, its a very capex heavy business. However, competition is one major risk for powergrid, especially if private players start bidding very aggressively for the projects bringing down ROE (covered in the post before; the motilal report covers this well).

There are no real competitors for powergrid in India as on date; with powergrid having a 85% market share in inter-state networks and 45% market share in total domestic network.

3 Likes
#8

To understand the inventory for an organization like powergrid, please have a look at their project cycle. Normally, Transmission projects are completed in a time frame of 3 years (18 months sometimes for RTM projects). So, sometimes they purchase the raw materials, in advance… so, for example they need six transformers for a project to be completed in 2 years… they will place the order for all six transformers, even if only 3are needed in the current fiscal year… hope this helps…
Disclosure: no investment

5 Likes
#9

Transmission has to be looked from 2 angles

  1. Transmission within the state (intra state). This is solely state’s responsibility. (No pvt player wants to touch it for obvious reasons).

  2. Transmission between states (inter state). This is where PGCIL comes in. Till recently, inter-state was PGCIL’s monopoly. This was opened only recently to competitive bidding. (That is why financials are weaker for all pvt players). Currently, two main competitors are there for inter-state projects - a) Sterlite Power Grid and b) Adani.

1 Like
#10

@Rits

To understand the inventory for an organization like powergrid, please have a look at their project cycle. Normally, Transmission projects are completed in a time frame of 3 years (18 months sometimes for RTM projects). So, sometimes they purchase the raw materials, in advance… so, for example they need six transformers for a project to be completed in 2 years… they will place the order for all six transformers, even if only 3are needed in the current fiscal year… hope this helps…
Disclosure: no investment

wont these items be placed under work-in-progress section as they are used to create fixed assets for the company and not manufacturing goods (for sale)

it might be dumb question , just curious to understand BS …

Regards,
Rama

#11

Power grid announced another interim dividend of Rs. 5. This is the third dividend in 2020 taking cumulative dividends for CY20 to Rs. 15. This is in contrast with CY19/CY18/CY17 where dividends distributed were Rs. 8.33/5.25/4.35. The large increase in dividend reflects increase in free cashflow generation due to higher capitalization of assets compared to CAPEX requirements. Debt/equity has also come down to ~2.01 due to higher free cash generation, the debt/equity has now come down to FY11 levels.

Disclosure: Invested (position size here)

2 Likes
#12

I have 2 slightly stupid questions:

  1. Does anyone have a financial model or some rough calculation showing the financials of one particular project over its lifetime? (15/20/30 years – whatever the lifetime may be). I was hoping to get a sense of how things work.
    a. If not, I’ve found a microgrid financial model. (It’s not ideal and majority of it is not even applicable, but this is the closest I could find). Suffices to say I don’t really understand some of the technical details. Would someone like to collaborate on modifying it?
  2. Based on the above, how does 15.5% ROE work on a project? As you move across time, equity component of the project keeps increasing. How is this part calculated and how does it affect tariffs?
#13
  1. the roe is only on initial equity… or proportionate share of any upgrade capex.
  2. the pricing works on bottom up basis to compensate for roe + incentive + tax+ interest + depreciation + opex. So overtime topline keeps falling as debt and depreciation drop. However net profit remains same assuming status quo on availability of the line.
1 Like
#14
Eq Inv. 3000
Debt 7000
ROE 15.50%
Interest 8%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
REV 1491.7 1454.3 1417.0 1379.7 1342.3 1305.0 1267.7 1230.3 1193.0 1155.7 1118.3 1081.0 1043.7 1006.3 969.0
DEP 466.7 466.7 466.7 466.7 466.7 466.7 466.7 466.7 466.7 466.7 466.7 466.7 466.7 466.7 466.7
INT 560.0 522.7 485.3 448.0 410.7 373.3 336.0 298.7 261.3 224.0 186.7 149.3 112.0 74.7 37.3
PROFIT 465.0 465.0 465.0 465.0 465.0 465.0 465.0 465.0 465.0 465.0 465.0 465.0 465.0 465.0 465.0

Thanks for that. So this is what it would look like right? (Getting rid of taxes, O&M, expenses, etc. to simplify the calc. and they’ll just be added on top)

#15

Depreciation is generally for the debt portion only, so you must stop after net block is 30% of original. I might be a little off, but not materially. So you can assume 6% each over 12 years and then stop. So on 13th year… depreciation, ebitda and sales will drop… but no impact on net profit component (only on 30% equity and other income is seperate if cash is retained.).

1 Like
#16

Increasingly new projects are basis of competitive bidding or tariffs and not regukated RoE (which can change every 5 years.

I hear that most such new projects work on basis of 11-13% project IRR. If we assume 70% debt then equity return is reasonable. The additional game.being played by renewables or private sector cos in tariff based bidding is trying to upfront the return of equity. Say if you have a debt moratorium for 2 years then the cashflow of first 2 years will go to equity holder which will boost his return meaningfully. More so part of the equity can be originally infused as preference debt to make it tax efficient vs dividend. This partially explains the bubble in renewables apart from ESG investing.

3 Likes
#17

Quick correction - Depreciation is till the salvage value and doesn’t stop at debt. So, effectively you are getting equity back and still earning returns on that portion.

2 Likes
#18

Came across this news - https://www.moneycontrol.com/news/business/ipo/power-grid-files-for-1-1-billion-invit-ipo-first-ever-by-a-psu-6402011.html

Can anyone help to understand - what is means for the business prospects and consequently stock price/dividend yield for power grid?

2 Likes
#19

I couldn’t find the filing on SEBI’s website (invit section)/the bankers website. Anyone seen it yet?

EDIT: made available on the site today:

https://www.sebi.gov.in/filings/invit-public-issues/jan-2021/powergrid-infrastructure-investment-trust_48912.html

#20

If invit floated by power grid comes out be successful (in context of current market), will it lead to the special dividend for current shareholder, as it would lead to hiving of current cash generating assets from its balance sheet.

#21

Haven’t been able to complete the document yet. Major highlights so far.

The Invit will have 5 TBCB projects. “Of the Sponsor TBCB Projects, we propose to acquire five projects initially with a total network of 11 power transmission lines of approximately 3,698.59 ckm and three substations having 6,630 MVA of aggregate transformation capacity, as of September 30, 2020, across five states in India (the “Initial Portfolio Assets”).”

These are:

  1. POWERGRID Vizag Transmission Limited (“PVTL”)
  2. POWERGRID Kala Amb Transmission Limited (“PKATL”)
  3. POWERGRID Parli Transmission Limited (“PPTL”)
  4. POWERGRID Warora Transmission Limited (“PWTL”)
  5. POWERGRID Jabalpur Transmission Limited (“PJTL”)

Essentially, money raised will be used to repay loans advanced by PGCIL to the tune of Rs. 5000 crores towards these projects. Plus the invit will hold 74% in these projects.

"Interest: The loan shall carry an interest rate of 14.5% (fourteen and a half per cent) per annum, which may be reset on each interest payment date occurring after the first interest payment date i.e. the last business day of each interest period.

Repayment: The relevant Initial Portfolio Asset shall repay the principal amount of the loan to the Trustee (in its capacity as the trustee to the Trust) or the Investment Manager through a single bullet payment upon expiry of the TSA. The relevant Initial Portfolio Asset shall pay the interest due on a quarterly basis on the last business day of each interest period, which dates may be reset on mutually agreeable terms.

All payments under the Facility Agreements shall be subordinate to any secured or unsecured loan obligations incurred by the relevant Initial Portfolio Asset from any bank, non-banking financial company or financial institution, which is neither an affiliate of the Trust or the Sponsor.

Premature repayment: The relevant Initial Portfolio Asset shall, with a prior notice to the Trustee, be entitled to prepay all or any portion of the outstanding principal amounts of such loan, without any prepayment penalty or premium.

Term: The loan agreement shall remain in force until all monies payable by the relevant Initial Portfolio Asset to the Trustee under the loan agreement are paid in full and all obligations of the Initial Portfolio Asset are discharged to the satisfaction of the Trustee."

In terms of future scope, they’re looking to acquire more such assets as they come online plus “Further, our Investment Manager may seek to generate non-transmission revenue from various avenues, including leasing of optical ground wire and transmission towers.”

Impressions so far: I’m not sure if I understood that 14% correctly (which would be AMAZING if it’s actually being advanced at 14%). The overall impact on PGCIL in terms of financials is limited (also considering these are TBCB and not regulated assets). These projects have revenues to the tune of 1300 crores each year and PAT of around 380 crores. But PGCIL get’s a huge chunk of money back will be significant (as % of market cap). (I’m guessing they’ll probably reinvest in other projects).

3 Likes
#22

Power Grid launches e-tendering portal ‘Pranit’

#23

InvIT likely to be launched early next week per news reports. Do you think this will be a game changer? I believe so.
New report

Disclosure: Long term investor and have trading position via May ending call options.
AJ

2 Likes
#24

Can you pls elaborate, game changer for INVITs or for Power grid and why?

#25

My understanding is as below:

  1. Success of this one would help them understand the appetite of market and more such projects can be brought under INVITS and at better prices - note that 74% is what is proposed to be transferred to the INVIT which means it’s only a partial exit and POWERGRID will continue to be a beneficiary from these assets(26% equity interest).
  2. INVIT will help reduce the balance sheet size, boost cashflows in the near term, reduce debts and finance cost which would help drive growth and return ratios for shareholders.
  3. The perception about this stock would change significantly(my understanding is that currently the market is valuing the company only based on its dividend yield similar to other government run companies) - once the market understand that the company is serious about cash flows and return ratios, quality share holders will get attracted which will lead to the rerating.

Disclosure: Invested and biased.

3 Likes