Sharekhan maintains their Buy rating on Power Grid with an unchanged price target of Rs 220. India’s aim to expand its renewable power capacity to 445 GW (versus only 87 GW in FY2020) would entail a capital expenditure of Rs. 2.86 lk cr (as per Power Grid’s estimate) in the next decade to augment power transmission lines. This provides strong growth opportunity of 8-9% annually for players such as Power Grid and would drive sustainable earnings growth in medium to long term.

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Near-term outlook looks promising as company seems to be on track to achieve its capitalization guidance Rs 20000-25000 cr for FY2021 (already achieved 48% of full year guidance in first half of FY2021 despite COVID-19 led disruption in Q1 FY2021). Potential asset monetization of five operational TBCB assets worth Rs 7164 cr would help company unlock value and proceeds could provide room for higher dividend payout given limited capex plan of Rs 10500 cr for FY2021. A robust order pipeline (of Rs 41000 cr) offers earnings growth visibility for the next few years (Sharekhan expects a 19% PAT CAGR over FY2021E-FY2023E) and RoE remain strong at 17-19%.

Moreover, Power Grid is trading at an attractive valuation of 1.2x its FY2022E P/BV (33% discount to its historical average one-year forward P/BV of 1.7x) and offer a healthy dividend yield of 5%. Power Grid’s regulated RoE model is resilient in current uncertain times and provides strong earnings visibility without any concerns of environment, social and governance (ESG) rating. Huge growth opportunity from investment in renewable power capacity makes Sharekhan positive on the stock.

Key risks:

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1) Slower than expected capitalization of projects (due to delayed project execution amid COVID-19)
2) Inability to win new projects under the tariff-based competitive bidding route.