Power grid - a superior alternative to Invits

National Monetisation plan lists same targets for PGCIL, as highlighted by management in the call

This is a very big number, giving visibility of 4-5 years of Invit transfer profits being recurring and not one time

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News Feed:

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Excellent set of numbers from Powergrid as expected:

Key observations below:

  1. Even after floating Invit, revenue has grown by a healthy 7.3% YoY.
  2. The finance cost and debt are on down trend while the cash balance has improved significantly.
  3. Notable increase in receivables YoY, which will remain a key monitorable going forward.
  4. EPS is up by 10% YoY and nearly doubled H1 to H1.

See the results announcement here.

AJ
Disclosure: Remain invested and views are biased.

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Hi Harsh, don’t you think that they gave out higher dividends because of governments’ demand during the covid crisis as they did from a lot of other PSUs also, and not because they suddenly had an increase in their cash flows.

I have experience of only 1.5 years, so apologies beforehand if it is a stupid question.

This can be another revenue stream for Power Grid Corporation.

WhatsApp Image 2021-11-26 at 17.07.34

Currently, the largest player in the Industry is Genus which has had many corporate governance issues and is incomparable to the financial might of Powergrid.

In addition to this Genus has more market share with private DISCOMS (67%) as compared to PSU DISCOMS. Hence, Powergrid which has better and longer relationships with PSUs can capture their market share. Lastly, smart meter deployment in itself will help the core business of Powergrid as it drastically increases collection efficiency and decreases AT&C losses of DISCOMS.

WhatsApp Image 2021-11-26 at 17.07.34 (1)

The pace at which smart meters are being deployed.

@harsh.beria93 views?

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About higher dividend, this has much more to do with reduced capex intensity and higher capitalizations. I have summarized the same in a previous post.

CAPEX vs Capitalization FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21
CAPEX 12’005.00 17’814.00 20’037.00 23’158.00 22’456.00 22’584.00 24’429.00 25’791.00 25’807.00 15’313.00 11’284.00
Capitalization 7’313.00 14’100.00 17’213.00 15’904.00 21’760.00 31’788.00 31’000.00 27’928.00 27’325.00 18’234.00 21’467.00
Capitalization/CAPEX ratio 60.92% 79.15% 85.91% 68.68% 96.90% 140.75% 126.90% 108.29% 105.88% 119.08% 190.24%

Additionally, monetization via Invit route has led to higher cash generation which has also resulted in higher dividend payouts.

About smart meters market, I do not know if it can absorb the kind of cashflows that is generated by Powergrid. In one of the previous posts, I did a breakup of revenues earned from other business ventures and it shows that none of the other businesses have scaled up to transmission revenues (<3% of overall revenues). So I will be careful of extrapolating their other business ventures.

P&L FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY11-21 Growth
Revenues 8’612.00 10’785.00 13’328.00 16’146.00 18’233.00 21’243.00 26’581.00 30’431.00 35’661.00 38’671.00 40’824.00 16.84%
Transmission charges 7’903.00 9’544.00 12’211.00 14’327.00 16’999.00 19’808.00 24’630.00 28’844.00 33’894.00 36’532.00 38’499.00 17.16%
Consultancy - services 299.00 290.00 228.00 333.00 385.00 466.00 582.00 491.00 502.00 514.00 434.00 3.80%
Telecom 187.00 201.00 231.00 276.00 275.00 392.00 504.00 607.00 663.00 698.00 707.00 14.22%
Sucharge income 203.00 309.00 744.00
Incentive income 217.00 427.00 481.00
PAT 2’697.00 3’255.00 4’235.00 4’497.00 5’046.00 5’948.00 7’520.00 8’198.00 10’034.00 11’059.00 12’036.00 16.13%

Disclosure: Invested (position size here)

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More than the revenue that it can potentially earn from the smart meter business do you have any idea to what extent can smart meters help them as it drastically improves the performance of DISCOMS. Won’t this lead to lesser receivables and lower receivable days. Additionally, I have read many articles which say that DISCOMS don’t supply electricity to many consumers 24/7 due to their constrained financial position. If smart meters come in then won’t this lead to increase in supply by DISCOMS and consequently more power being transmitted through powergrid?

not exactly. It allows them to cut their losses as power theft control is a bit easier to manage. Think of one use of smart meters as prepaid SIM. Some last mile customers dont pay on time or steal. The idea is to install smart meters which are recharged by customers to have power in their house. Once the unit power consumed value exceeds the meter top up value, the meter cuts power to the house.

This is in theory to cut power theft one of the reasons for smart meters deployment.

Combine with SCADA power distribution control software, you can precisely know where power is being stolen.

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Got this. Thanks.

On the other hand, won’t the customers who pay on time and don’t receive 24/7 electricity start getting it full time and thus leading to increased electricity supply. I live in a small city in Bihar and we receive electricity for about 18 hours a day. Thus, this could theoretically increase the electricity supply to towns like mine by about 33%. I also have a house at my farm and there the case is even worse.

https://www.financialexpress.com/industry/discom-losses-down-38-in-fy20-may-have-risen-in-fy21/2292118/

According to this, the AT&C losses were about 21%. So, in a very simplistic sense, this means that more than 80% of the electricity bills are being paid. so, 80% will get more electricity?

I understand that it is a very simplistic explanation, but I just want clarity in regard to this.

Incorrect. you only get electricity if you pay for it. If they’re able to stem their losses and bring it below 8%, then availability increases; there is add on effect of providing longer hours of eleccy but just because 10MW more power is now available, you’re not suddenly increasing your consumption, right?

In one sense, since houses are underpowered in their needs(a typical household would need a little over 200 units/month to be comfortably useful; worldwide developed countries is 4000+/year; we are at less than 1200/year per capita; this is from CESC/Coal India conf call, I think), we would see increased consumption and hence more transmission via PG initially.

18hrs to 24 hrs availability would see increase in consumption not a geometric increase but decent enough

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Do anybody have any info about why Electricity Amendment Bill 2021 is not going to be introduced in this winter session of parliament? I could not find the same under Bills to be tabulated.

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Dividend to be decided.

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How could we explain the huge valuation difference of PGCIL compared to private players like Adani Transmission? Are the following enough to explain such a difference?

  • introduction of Tariff Based Competitive Bidding (TBCB)
  • entry of private players and a PSU discount (?)
  • muted growth in comparison
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If the requests of private sector transmission companies, this could take away the advantage of Powergrid and also become a risk to future orderbook.

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Went through the Q3 FY 22 Concall and had some interesting takeaways. I am just mentioning the ones that I found the most interesting.

  1. The CAPEX target for FY23 is 8500 crores. If we take the current cash flow run rate, they will have a FCF of about 20000 crs= 28000 (approx)- 8500 crs. That is simply unbelievable. This means that currently the company is trading at about 6xFY23 FCF.

  2. The biggest highlight of this call for me
    was that they are going into new areas of smart metering, solar projects and data centres. I had no idea that they were interested in solar and data centres. Don’t think that anyone has mentioned this here.

While smart metering won’t have much effect, solar projects and data centres require massive capital with longer gestation periods, this is perfect for powergrid with the amount of FCF it is going to generate.

  1. Company is going to carry out a 100 MW solar power project at some land in Manesar. From what I could understand it is their own land.

  2. Going to invest 350 crs. in data centres next year.

Going forward if the company starts investing big in data centres and solar projects, it could become the perfect growth and FCF machine.

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Hi Chaitanya,

Freecashflow generation will be high because of very high asset commissioning (+ invit monetization), I have also mentioned this in the past. However, they will now struggle for growth as the kind of cashflows that are thrown by transmission division cannot be absorbed in any other venture (and then produce high returns). If you look at my post below, you will clearly see that Powergrid’s competitive edge is in building and maintaining transmission lines. They have not scaled even 1 other business venture (be it consultancy or telecom) at faster rates than their base business growth. So before getting excited about solar projects, data centres, etc. we should also look at their track record.

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Hi Harsh,

Agreed that they will not have many avenues to reinvest relative to their FCF generation. However, my targeted XIRR is about 20-25%. In this year itself, they have given over 10% dividend yield (expecting another 2% in the next quarter). At least 5% earnings growth can come from a decrease in interest cost (very conservatively in my opinion) and another 5% from capitalization and realization of revenue from new assets. In earnings terms only they are getting 10% growth and another 10% from dividends. And currently, they haven’t included the 29,000 cars of orders that they received under RTM for Leh and Gujarat in their calculations of CAPEX.

On the part of them venturing into new fields. I agree that they have been incapable of scaling any other business. One of the major reasons for it is that the addressable market for these itself was very small. However, both data centers and solar projects have a large addressable market. Additionally, they also talked about how they have gained some experience in energy storage technology.

I am not counting on these non-core businesses while making my thesis for investment into it. But this does give some room for a positive surprise. What gave me a bit of confidence that they will be scaling up their non-core businesses was that the management explicitly stated that they are aware of this problem.

Another statement that gives me some confidence in future stock returns is that the management said that now that their leverage is below 2:1 and now they can look at doing buybacks. I have read that in the past companies like TCS gave good stock returns even without high earnings growth because they did buybacks to decrease the float and increase the EPS. Now that both NMDC and HPCL have done buybacks, this sets precedent for other PSUs to do this also.

Apologies in advance if some information has been misinterpreted by me. Am a new investor, still trying to understand the businesses. Would love to get your view on this.

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Instead of going for buyback and investments in non core businesses, i think they should try to deleverage the balance sheet first. It is also a way to boost EPS in better way.

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