Power Grid: Business Analysis

PGCIL has had a near monopoly in establishing and maintaining the power transmission assets of India over the years. It has earned predictable returns on its investment due to regulated ROE based tariff payout structure on majority of its capitalized transmission assets. The increased capitalization over the last few years augurs well for near term earnings however the reduced capex intensity will hinder cash flow accruals beyond a period as future growth will require increased capex intensity at some point. The company has started monetization of TBCB assets through InvITs which will allow it to invest in future projects.

Power Grid Corporation of India Ltd (PGCIL) is India's largest electricity transmission company. It owns and operates about 85% of the country's inter-state and inter-regional electricity transmission network. PGCIL manages around 172,000 circuit km (ckm) of transmission lines, 264 sub-stations and 470,000 megavolt amperes (MVA) of transformation capacity.

PGCIL is a Maharatna CPSE with 51.34% equity held by the Govt of India as of Dec 2021.

Overview of the Power Sector and the Power Transmission Landscape

India’s power sector is very dynamic and diversified with the presence of mixed power generation sources including conventional and renewable, a synchronously operating national grid comprising inter-regional, regional and state grids, a vibrant electricity market and a distribution sector providing electricity to end consumers.

India has traditionally faced acute energy deficit and peak demand supply mismatch. This has changed with investments by the government across the power value chain i.e., from power generation to distribution. Energy deficit has fallen from 2.1% in FY16 to 0.3% in FY21 and peak deficit has fallen from 3.2% in FY16 to 0.4% in FY21.

The per capita consumption of electricity in India is around 1200 kWh compared to world average of around 3200 kWh. The government has envisioned per capita consumption at 1616 kWh by 2025 and ~2900 kWh by 2040. To achieve the envisioned target, the government would have to invest considerably across the power value chain. This, along with rising focus on Renewable Energy sources for power generation, will boost investment in power transmission infrastructure.

The transmission of electricity is the bulk transfer of power over a long distance, generally from power plants (power generating sources) to substations or from a power surplus region to a power deficit region. Inter-regional transmission networks are required in India because power generation sources are unevenly distributed and power needs to be carried over large distances from areas where power is generated to areas where load centers and demand exist.

Initially, India had five regional grids, namely, Northern, Southern, Eastern, Western and North Eastern. Over the years, all these grids were interconnected with the country achieving the status of “One Nation-One Grid-One Frequency” in December 2013.

Business of PGCIL

The role of PGCIL in the whole power sector ecosystem is to set up the necessary infrastructure that allows the supply of power from power generating units such as Thermal/Hydro/Wind power plants to the state distribution companies who then supply power to households and factories. PGCIL is also required to maintain the transmission line upon its commissioning and ensure that it fulfils the performance obligations.

PGCIL’s transmission project implementation capabilities encompass all facets of a project’s development, from conceptualization to construction to the commissioning of a project, at which point it can begin operation.

PGCIL’s transmission projects are classified into:

1.      Generation-linked transmission projects, to facilitate the transfer of power from a specific new interstate or inter-regional generation project to its intended beneficiaries.

2.       Grid-strengthening projects that strengthen power transfer capacity and add to reliability and security.

3.       Inter-regional transmission projects that strengthen power transfer capacity between regions and allow for inter-regional power exchanges.

The company has in-house competency in the design and engineering of extra high voltage (EHV) systems. It also has experience in the design and engineering of transmission lines and substations (including GIS) for different wind zones, climatic conditions, seismic zones, terrains, seashores and tough hilly terrain. It enters into separate EPC contracts for tower erection and stringing of power lines and for substation construction, respectively. The company procures from vendors and supply to the EPC contractors the necessary conductors and insulators for transmission lines and transformers and reactors for substations. Major components and raw materials are sourced from approved sub-vendors of acceptable quality.

Derisked Revenue Model

PGCIL’s charges for recovery of service provided to transmission customers are governed by tariff norms notified by the CERC. Under the Tariff Regulations applicable for Tariff Block 2019-24, the company has been permitted to charge its customers, the transmission charges for recovery of annual fixed cost (AFC) consisting of various tariff components such as Return on Equity (ROE), Interest on Outstanding Debt, Depreciation, Operation & Maintenance expenditure and Interest on Working Capital.

The ROE is computed on pre-tax basis by grossing up the base rate of return on equity of 15.5% at the effective tax rate of the respective financial year. The company has to adhere to certain operational benchmarks such as, minimum system availability of 98% and minimal line tripping, in order to ensure recovery of annual transmission charges and earning incentive for availability being higher than normative levels.  Its system availability was as follow:

Its trippings per line stood at:

PGCIL does not face material risk from the demand side due to presence of long-term transmission service agreement that ensures a stable revenue stream once the transmission project is commissioned. In FY22, the company achieved the highest availability and the lowest trippings in the last 5 years.

Capex and Capitalization Outlook

During FY22, the company has capitalized assets of Rs. 20,694 crores adding about 5,450 ckm transmission lines, 7 new sub-stations and about 43,564 MVA transformation capacity in the transmission system. Besides, the company has made capital expenditure of Rs. 9,060 crores. Capitalization refers to capital expenditure that has translated into assets, it is the value of projects that get commissioned. Capitalization adds to the gross asset block. The rate of capitalization also alludes to the pace of project commissioning. As capitalization increases, near term earnings increase while the pace of capex determines the future accrual of earnings.

The capitalization target for FY23 is expected between Rs. 14000-15000 crores. For FY23, the company expects a capex of Rs. 8,000 crores.

The company currently has work in hand of Rs. 52,000 crores, consisting of Rs. 8,200 crores ongoing projects, Rs. 28,000 crores of new projects and Rs. 15,800 crores of TBCB projects.

The capex and capitalization schedule over the years:

Over the last few years, as depicted in the above table, the capitalization has been consistently higher than capex. This is because PGCIL was putting up new capacities during the first half of the decade which have now been capitalized as they have achieved commercialization.

Introduction of Tariff-based Competitive Bidding (TBCB) has Heightened Competition

In order to encourage private sector participation in power transmission projects, the government introduced TBCB in 2011. For projects being implemented under TBCB route, the tariff is discovered through competitive bidding process wherein the successful bidder would be the one who has quoted the lowest levelized tariff for a period of 35 years for establishing transmission projects on a build, own, operate and maintain basis. The return for the successful bidder under the TBCB mechanism is lower than that under cost plus basis as the entry of a large number of players pushes the bid downwards.

PGCIL has been able to secure 21 transmission projects based on TBCB, of which nine projects have become operational until now. The TBCB assets of PGCIL are housed under project specific subsidiaries/SPVs.

The asset portfolio of PGCIL primarily consists of cost-plus, fixed ROE projects however, the increase in share of TBCB based projects can drive the ROEs lower as they go through lowest bidder route where competition is high. PGCIL will still continue to receive strategic transmission projects on nomination basis from the government.

Telecom Division

PGCIL has set up a pan India fiber optic-based communication network primarily to meet the critical communication requirements for safe and reliable grid operations. The spare capacity of the telecom infrastructure so available is being utilized for providing commercial telecom services to various customers such as telecom service providers, IT companies, PSUs, State Govts., Defense establishments etc. The revenue from the telecommunication business is mainly on account of leasing bandwidth of the company’s fiber-optic lines.

Power transmission lines, crisscrossing the entire length and breadth of the country connecting the major metropolitan cities/towns, provide an excellent infrastructure for stringing optical fiber cable which can be used to set up a high-grade long-distance telecommunication network of high capacity.

PGCIL is exploring new business opportunities within the telecom segment viz. setting up of Data Centers, International Long Distance (ILD) Bandwidth Business to directly serve neighboring countries with reliable connectivity. It has applied to the DoT for grant of ILD service authorization in its existing Unified License. It is also one of the implementing agencies for ‘Bharat Net’ Phase-I project envisaged to provide broadband connectivity to Gram Panchayats (GPs). The Company has completed the work on 473 blocks out of 511 Blocks and successfully handed over to BBNL under Bharat Net Phase-I Project. Further, cumulatively 321 blocks asset capitalization has been completed out of 511 blocks. The scope of work is spread across 39 districts in 5 States viz., Andhra Pradesh, Telangana, Himachal Pradesh, Jharkhand & Odisha.

Consultancy Services

PGCIL has established itself as one of the leading consultants in the field of Power Transmission, Sub-transmission, Distribution, Load Dispatch & Communication and Telecom sectors. It leverages its Techno-Managerial expertise to provide Consultancy, Project Management and Asset Management Services to various clients which include state-owned power utilities, Railways, multilateral funding agencies like World Bank & ADB, IFC and Govt. of India. It has so far established foot prints in 21 Countries spread across Asia, Africa, CIS countries and Asia Pacific. It recently entered into an agreement with Africa50 for undertaking PPP projects in the African continent, in this direction further steps for investment in Kenya under PPP mode through a Joint Venture with Africa50 have started.

The consultancy income mainly consists of fee for the execution of transmission and communication system-related projects on a turnkey basis and technical consulting assignments.

Tapping Emerging Opportunities in EV Charging and Smart Metering Space

PGCIL is developing Electric Vehicle (EV) Charging Infrastructure across the country which would facilitate E-Mobility solution in road transport covering Electric 2-Wheelers, E-Rickshaws/Autos, E-Cars, Buses etc. It is currently operating EV charging stations in various cities such as Ahmedabad, Bengaluru, Delhi, Gurugram, Faridabad, Manesar etc. The company is also exploring to establish Battery Charging-cum-Swapping solution for 2-Wheelers & E-Rickshaws/Autos and charging infrastructure for E-Buses etc.

PGCIL has also planned to foray into the smart metering infra business where it will invest in the smart meter asset development business as floated by the respective state utility. The company aspires to be across the value chain wherein the company will set up the required infra and manage the O&M business as well. It plans to invest Rs. 10000-12000 crore over the next four years.

Exposure to Financially Challenged Discoms

PGCIL realizes all its revenues from power distribution companies who have been facing financial difficulties in serving their obligations. This risk has however been mitigated by the presence of payment security mechanism in the form of Letter of Credit (LC) backed by the Tri-Partite Agreements (TPA). The TPA was signed among the GOI, RBI and the individual State Governments subsequent to the issuance of the One Time Settlement Scheme of State Electricity Boards dues during 2001-02 by the GOI. The TPA also provides that if there is any default in payment of current dues by any State Utility, the outstanding dues can be deducted from the State’s RBI account. The LC shall be for an amount equal to 1.05 times the average amount of the first bill of a year. Its collection efficiency (including arrears) stood at:

Monetization Through InvIT

In order to mobilize resources to meet future capital requirement for Company’s growth, PGCIL has undertaken monetization of assets through Infrastructure Investment Trust (InvIT) model. In line with the approval accorded by the GOI, the company monetized operational assets held through 5 TBCB SPVs with gross block value of about Rs. 7,200 crores comprising 3699 ckm of transmission lines and 3 Substations having 6630 MVA transformation capacity in May 2021. For FY23, the company expects Rs. 7000-7500 crore worth of TBCB projects to be transferred to the InvIT as per the national asset monetization plan.

Financials

For PGCIL, it makes more sense to track the capex and capitalization the company does in order to have an idea of how the company is doing and what to expect. Nevertheless, PGCIL has grown revenues at a CAGR of 15% in the last 10 years which slowed down to 10% in the last 5 years. Same was the case with PAT with growth slowing down to 14% from 16%.

Snapshot of financial performance (source – sharescart.com)

The stock currently offers a dividend yield of 5.5% and with stable and predictable financial performance. The share price appreciation is anyone’s guess with PSUs as there a always an overhang of government ownership and profits not being the primary motive of PSUs.

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