Centre's rejection of PFC stake sale plan drives Power Grid shares up 3%

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Shares of Power Grid Corporation of India Ltd (Power Grid) climbed over 3 percent on Tuesday after a news report said that the government has rejected REC's proposal to sell Power Finance Corporation's (PFC) stake to Power Grid.

There were reports stating REC had asked the government to consider selling PFC’s stake in the company to Power Grid.

“The government has rejected power financier REC Ltd's proposal of its takeover by Power Grid Corp of India (PGCIL),” a September 26 report in the Economic Times said, citing power and new and renewable energy minister RK Singh.

Power Grid's market capitalisation had fallen about Rs 33,000 crore in the last two trading sessions following reports of the proposal, the report said.

Foreign brokerage firm Citi believes that a big overhang is removed with the rejection of proposal by the power ministry. The brokerage firm has a ‘buy’ call on Power Grid shares due to safe and stable business model, high return on equity and high market share.

Also Read | PGCIL: Falling share prices could get strong support from valuation and dividend yield

Citi has a target price of Rs 270 on the stock price. At 9:50am, the stock was up 0.5 percent at Rs 202.2 on the BSE. The scrip has risen today after seven days of consecutive losses.

“It might be good for Power Grid as it is in the business of transmitting the power and it doesn’t have any experience in financing projects. It was an unrelated diversification for Power Grid and it might not be able to provide any expertise in this segment apart from that it would also impact power Grid’s main business,” ICICI Direct Research said.

Media reports indicate that Power Ministry is in talks with Power Grid to purchase PFC’s 52.63 percent stake (Rs 144 billion) in REC, Jefferies said in a research report.

Jefferies pointed out that Power Grid has sufficient cash and it remains positive on the one year and medium-term transmission spend growth story. "But, this is a near-term dampener and could negatively impact FY23E-25E EPS by 3-5%. Dividend yield could also be lower at 4% vs 6% in FY23E," the global brokerage firm cautioned.

Power Grid transmits about 50 percent of the total power generated in India on its transmission network. It also undertakes transmission related consultancy to more than 150 domestic clients and owns and operates 71,673 km of telecom network.

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