Jitendra Kumar GuptaMoneycontrol Research
Power transmission, which was opened up to the private players a few years ago, is now going through a consolidation phase. Companies such as Adani Transmission, Sterlite Power, Kalpatru Power and Essel Group have now emerged as the leading players in this sector.
Investors have also started looking at these companies differently based on estimates of scale and certainty of returns. For instance, among pure transmission plays, Adani Transmission's share price has risen almost 8 times since its demerger from Adani Power in 2015.
Power transmission is a regulated business, where transmission assets are built at competitive tariffs. Once the assets are in place, generation companies can use these assets for transmitting power to different markets, regions. But the buyer or the generation company has to pay a charge for using these assets. This is typically between 80-150 paisa per unit of power transmission depending on the nature of cost and operating expenses of these assets which may differ depending on location. For instance, a transmission line connecting to a small town or city in any difficult terrain would cost more.
Nevertheless, a transmission company makes money consistently and at a predetermined rate of return ranging between 12-16 percent. This attracted a lot of players in the early stages of privatisation. However, many of them including Reliance Infrastructure, GMR Infra, Lanco have either sold their transmission assets or are looking to exit.
"Post FY14, the competitive intensity has been waning, reflected in the presence of only major credible players in the private sector with relevant experience. In fact, the average number of players participating in bids fell massively from 7 between FY11 and FY14 to 4 in FY17.
This was an outcome of a few developers facing difficulties in commissioning projects on time, which led to an escalation in project costs, in turn, leading to revenue loss," says a note by broking firm Edelweiss Securities.
The other important reason is that private players have brought efficiencies and ready to work on competitive terms. Post privatisation, transmission tariffs have dropped by nearly 30 percent. “What has changed is that the leading private players have demonstrated lower tariffs, faster execution and can now undertake complex projects at good returns," Pratik Agarwal, CEO, Sterlite Power Transmission Limited.
Easing competition is good news for focussed players. Analysts estimate investments of close to Rs 290000-300,000 crore to be made by transmission companies over the next four years, 1.5 times higher than the investment made during FY12-17.
"Transmission sector needs an investment of about USD 50 billion by 2022. The sector looks promising from the long-term perspective particularly for those players who have proven execution capabilities," said Agarwal.
Pure power transmission plays like Power Grid Corporation and Adani Transmission have ambitious plans to build assets. Power Grid, which has 1,43,000 circuit kilometer (CKM) of the transmission line, is looking to deploy about Rs 30000 crore annually over the next two to three years.
Adani Transmission is aiming to own and operate close to 20000 ckm of transmission lines having an asset value of close to Rs 40000 crore by the end of 2022. Adani Transmission is currently having 5450 ckm (including under construction and acquisition) of transmission lines with the capital employed in the business of about Rs 12173 crore in FY17.
Due to higher capitalisation of the assets, in the case of Adani Transmission, the Street is expecting its book value to compound at 36 percent over the next two years compared to 17 percent annual growth for Power Grid. However, the market has already factored in these growth numbers with Adani Transmission currently trading at much higher valuations than Power Grid (See table).
Power Grid, which has got slightly better return ratios and control on leverage (see table), is relatively better placed at the current market price.
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