Analyst Call Tracker: Why some analysts are sceptical about Power Grid despite the stock rally

In spite of a growth in earnings and a rally in the stock price, some brokerages feel the stock is at risk of increased competition in tariff-based competitive bidding, besides growth challenges.

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The Power Grid stock has gained over 65 percent in the last one year, and nearly doubled over the past five years. But despite the continued rally, a few analysts appear to have concerns.

According to the Moneycontrol Analyst Tracker as of February 1, the number of analysts tracking the stock has fallen from 23 to 21. ‘Buy’ calls on Power Grid stock have fallen sharply, from 19 to 12, ‘sell’ calls have remained at 4, while ‘hold’ calls have increased from zero to 4. The average 12-month target price is Rs 231.53.

Also read: Why this brokerage dropped PowerGrid, picked Pidilite for its model portfolio

Power Grid Q3 financial results

In Q3FY23-24, Power Grid Corporation of India reported a consolidated net profit of Rs 4,028 crore, up 10.5 percent on-year, while EBITDA rose 3.2 percent on-year to Rs 10,483 crore. At Rs 11,819.70 crore, the consolidated revenue for the same period saw a marginal gain, up from Rs 11,530.22 crore in the previous fiscal. On February 3, a day after announcing the Q3FY23-24 results, the stock closed 3 percent higher.

Limited growth opportunities driving downgrades

In January 2024, Investec said in a report that along with growth challenges, the stock is at risk of increased competition in tariff-based competitive bidding (TBCB). Nuvama Institutional Equities, which has a `hold’ call on the stock, said in a November 2023 note that the company’s PAT growth is likely to be less than 5 percent over FY24-265E, due to a high base. Further, the company faces a long gestation period between winning TBCB bids (FY 2024-25), constructing them (FY 2025-26), and commissioning them by FY27.

Also read: Power Grid Q3 net profit inches up 10.5% to Rs 4,028.25 crore, beats estimates

What makes Power Grid a stock to ‘Buy’

Despite the downgrades and slow growth, a majority of analysts tracking the stock continue to be optimistic. In January 2024, a Jefferies report said that smart metering and asset monetisation could continue to positively influence the stock.

While a few brokerages have previously raised concerns on capex, BoB Capital said in a report in November 2023 that the “mega Rs 1.9 trillion capex pipeline over FY2024-32 is likely to invigorate the asset base, and hence valuations.” This capex pipeline includes Rs 1.7 trillion for transmission infrastructure. The long-term transmission capex target looks plausible, given the government’s renewable energy target of 500 GW by 2030, according to analysts.

In November 2023, it was reported by IIFL Securities that by 2032, Power Grid “plans to invest Rs 1.16 lakh crore in inter-state transmission projects, Rs 37,000 crore in intra-state transmission projects, Rs 10,000 crore in cross-border commerce, and Rs 7,500 crore in foreign activities.”

In a post earnings report, CLSA gave the stock an ‘Outperform’ rating and raised the target price to Rs 285. It said that the key message from the result was that it has gained market share in new bids in a much bigger market.

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