India's Net-Zero Goals Will Support Future Renewable Transmission Investments

Key Takeaways

• India's ambitious economic plans and high transmission project CapEx support Power Grid's potential revenue and asset growth, enhancing future earnings.
  
• Focus on sustainable projects and interstate infrastructure positions Power Grid for increased profitability through high-margin projects and green energy investments.
  
• Heavy reliance on capital expenditure and bidding poses execution risk, while high debt and competition may strain financial resources and margins.

Catalysts

An electric power transmission utility, engages in the transmission of power in India and internationally.

• The growth outlook for Power Grid is strongly supported by India's ambitious plans to become a USD 5 trillion economy, which includes rapid industrialization, urbanization, e-mobility, and energy transitions, potentially driving up future revenues due to increased demand for electricity and transmission infrastructure.
  
• The substantial projected capital expenditure (CapEx) for transmission projects in India, with Power Grid expected to participate significantly, could enhance the company's future revenue streams and increase its asset base, potentially leading to higher earnings.
  
• Power Grid's involvement in high-value projects like the many HVDC links and significant AC projects suggests possible improvements in net margins and profitability due to the high-margin nature of these projects.
  
• The company's strategic focus on sustainability, including the commitment to achieve net-zero emissions by 2047, could lead to increased demand for renewable energy solutions, driving revenue from green energy investments and projects.
  
• As Power Grid becomes a major player in the development of interstate transmission infrastructure, with an increased number of projects to be executed, the company could expect a substantial boost in revenue and earnings from long-term contracts arising from these interstate projects.

Power Grid Corporation of India Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Power Grid Corporation of India's revenue will grow by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 34.3% today to 36.1% in 3 years time.
• Analysts expect earnings to reach ₹192.0 billion (and earnings per share of ₹20.69) by about December 2027, up from ₹157.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹218.8 billion in earnings, and the most bearish expecting ₹172.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.2x on those 2027 earnings, up from 19.4x today. This future PE is greater than the current PE for the IN Electric Utilities industry at 20.8x.
• Analysts expect the number of shares outstanding to decline by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.15%, as per the Simply Wall St company report.

Power Grid Corporation of India Future Earnings Per Share Growth

Risks

• Heavy reliance on capital expenditure and bidding success for future growth, with over ₹3 lakh crore of projects yet to be executed, introduces significant execution risk that could impact future revenues and earnings.
  
• Potential weaknesses in Return on Equity (ROE) for TBCB projects due to competitive pressures, which could deteriorate profit margins and affect net earnings.
  
• High debt levels (₹1,22,499 crores) relative to net worth (₹92,061 crores), and a debt-to-equity ratio of 57.43, could strain financial resources and impact net margins if interest rates rise or operational cashflows falter.
  
• Losses in joint venture company EESL affecting consolidated profits by ₹100 crores could pose risks to overall earnings if such financial challenges persist or escalate.
  
• Increasing competition and potential regulatory changes, such as the recent reduction in O&M charges, may negatively affect revenue streams and profitability.

Valuation

• The analysts have a consensus price target of ₹339.68 for Power Grid Corporation of India based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹426.0, and the most bearish reporting a price target of just ₹232.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹531.4 billion, earnings will come to ₹192.0 billion, and it would be trading on a PE ratio of 23.2x, assuming you use a discount rate of 12.2%.
• Given the current share price of ₹327.55, the analyst's price target of ₹339.68 is 3.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.