Buy Power Grid; target of Rs 223: Motilal Oswal

Motilal Oswal 's research report on Power Grid

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%. TBCB currently remains small in the overall context (3% FY20 PAT; 5% gross block). However, with increased awarding at the interstate/intrastate level on a TBCB basis, its pie would eventually grow. Over the past one year, PWGR has won ~7 projects on a TBCB basis. We expect profits from TBCB projects to rise to INR7.8b in FY23 from INR3.7b as new projects get commissioned.

Outlook

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.