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Power Grid rating: Buy — Rebate impacted profitability in Q1

PWGR has maintained its FY21 capex and capitalisation targets of Rs 105 bn and Rs 200–250 bn, respectively.

Power Grid’s (PWGR’s) results highlight the impact of rebate (Rs 10.75 bn), with reported S/A PAT declining 18.5% y-o-y to Rs 28.1 bn. Adjusted for the same and prior-period revenue, PAT was up 21% y-o-y. Rs 234-bn worth of awards would be bid out under various schemes, but we expect some delays. In this context, a declining order book does present the risk of growth slowdown. However, valuations at 1.3x FY22e P/BV and ~9% FY22e dividend yield remain attractive for a company with steady RoEs of ~17%. Maintain Buy, with DCF-based TP of Rs 221/sh.

Rebate impacts profitability: Reported S/A PAT was down 18.5% y-o-y on account of an Rs 10.75-bn rebate. Not accounting for the rebate and prior-period sales, PAT would have been up 21% y-o-y to ~Rs 28 bn, partly aided by other income. Other income was up 49% y-o-y, aided by higher late payment surcharge (Rs 2.65 bn). We note the impact of rebate was baked in our numbers v/s reported by PWGR as an exception, which led to the apparent difference on an adjusted basis.

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Profit in the Telecom segment declined 6% y-o-y to ~Rs 1 bn, and profitability for the Consultancy segment decreased 61% y-o-y to Rs 0.2 bn. Profit from TBCB subs was largely flat at Rs 0.8 bn. Capitalisation stood at Rs 11.8 bn, while capex was at Rs 19.1 bn.

Maintains capitalisation and capex guidance for FY21: PWGR has maintained its FY21 capex and capitalisation targets of Rs 105 bn and Rs 200–250 bn, respectively. As per the co., it plans to commission Bipole-I of Raigarh Pugalur in the current quarter. Receivables increased to Rs 82 bn in Jun’20 (from Rs 49 bn in Mar’20). Conversely, they reduced to Rs 75 bn in Jul’20. Collection efficiency increased June onward and came in at >100% for June and July.

Declining capitalisation could impact growth, but valuation remains attractive: While the awarding of transmission schemes (~Rs 250 bn) under renewable integration provides a good opportunity to win new awards, our checks have suggested certain challenges could defer their awarding. If new orders do not come in, a declining order book could impact the pace of growth in profitability. However, subsequent lower capex (along with the removal of DDT) also implies potential for higher dividends (FY22E div. yield of ~9%).

Besides, the longer term picture remains intact as investment in RE and growth in power demand would necessitate the need for transmission works. Valuations at 1.3x FY22e P/BV remain attractive and do not capture any growth potential (EPS FY20–22e: 7% CAGR).

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