We analyzed details of Power Grid (PWGR)’s tariff-based competitive bidding (TBCB) projects from their annual reports. At an aggregate level, in our view, PWGR should be able to generate ~14% equity IRR (assuming a debt-to-equity ratio of 80:20 for its 11 under-construction projects). Equity IRR for its eight commissioned TBCB projects varies in the range of 2-27%.
A declining order book and capitalization schedule do bring the risk of slowdown in terms of growth. However, subsequent lower capital expenditure (along with the removal of DDT) also implies potential for higher dividends. We expect DPS to rise to INR14.3/sh in FY22, from INR10/sh in FY20, implying FY22 dividend yield of ~8%. PWGR’s stock trades at just 1.2x FY22E P/BV for steady long-term growth and an underpenetrated market. Maintain Buy, with DCF-based TP of INR223/sh.
~ Motilal Oswal