Analyst Call Tracker: Why PowerGrid stock picked up maximum downgrades in last quarter?

Power Grid's valuations are not supportive, and the government’s stance on incentivizing investments does not justify higher valuations for Power Grid.

Power Grid has lost favour with analysts over the last quarter, witnessing the most downgrades according to Moneycontrol's analyst tracker.

Major brokerages like Bank of America (BofA) Securities and HSBC have turned bearish on the stock due to valuation concerns, a shift towards renewable energy, and slowing demand, among other factors.

The analyst tracker shows that 'buy' recommendations for Power Grid dropped to ten (10) in the July-September quarter, down from 13 in the previous quarter, as three brokerages downgraded the stock to 'hold.' However, the number of 'sell' calls remained steady at eight.

Why has Power Grid fallen out of favour?

• BoFA's checks with the power ministry and regulators indicate that RoEs in the power sector are likely to be curtailed due to market maturity and limited future capex needs.
• Its increased participation in tariff-based competitive bidding projects could dilute future RoEs, as these projects may not offer the same profitability levels as earlier ventures.
• The company's diversification into new business areas may also dilute its RoE, as these ventures may not generate high returns in the short term.

Valuation Pressure

Power Grid shares have enjoyed a strong rally over the past year, climbing nearly 63 percent, significantly outpacing the Nifty 50's 26 percent gain during the same period. However, this surge has raised concerns among analysts about the stock’s premium valuations. Despite a 4 percent dip in the past three months, brokerages remain cautious.

According to analysts, Power Grid's valuations are not supportive, and the government’s stance on incentivizing investments does not justify higher valuations for Power Grid. In fact, HSBC expects the valuation premium in power stocks to cool down after the summer, as capacity additions address current shortages.

Demand Growth

In FY24, demand growth was driven by power shortages caused by the weakest monsoon in over a century. HSBC firm believes this surge was temporary and will stabilise as additional capacity is added.

Despite strong short-term demand, the 5- and 6-year CAGR growth for electricity demand has been around 5.1 percent, reflecting a limited impact from industrial activities on power demand, the brokerage said.

Shift to Renewable Energy and Decentralization of Transmission

Increased focus on RE and captive RE plants will reduce demand on state distribution companies (discoms), potentially impacting their finances, according to HSBC.

Additionally, the expiration of the ISTS waiver and decentralization of transmission with battery storage will reduce reliance on the central transmission system, impacting Power Grid's prospects, said the international brokerage.

Analysts at HSBC expect gradual electricity reforms due to state involvement and the central government's smaller majority, impacting the long-term sector outlook.

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