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Photo: Priyanka Parashar/Mint
Photo: Priyanka Parashar/Mint

Power Grid faces limited hit from virus rebates; growth outlook dim

  • With demand hit, discom dues are rising. This can stretch Power Grid’s working capital, weighing on earnings
  • Power Grid’s capital expenditure (capex) is slowing, reflecting sluggish investments in the transmission sector

Following the directive from the ministry of power, the board of Power Grid Corp. of India Ltd approved a one-time rebate of 1,075 crore to electricity distribution companies (discoms) and state electricity boards.

As part of the economic stimulus package, the government last month asked Power Grid to consider offering a rebate of 20-25% on interstate transmission charges for the period of the lockdown.

Shutting down of industries and commercial establishments adversely impacted cash flows of discoms, necessitating relief measures by the government. According to Motilal Oswal Financial Services Ltd, the rebate pertains to April and May when large parts of the country were under a lockdown.

A rebate of 1,075 crore will be a 10% hit to annual profit, similar to what the Street had anticipated. Interestingly, the Power Grid stock has now recouped all the losses it incurred after the rebate plan was announced by the power ministry in May. The clarification that the rebate is a one-time cost has helped the stock. Power Grid reported a profit of 9,938 crore at the standalone level in FY19. This is projected to rise to 10,400-10,900 crore in FY20. The recovery also underscores the benefits of the regulated business model of Power Grid, where its earnings are less prone to demand vagaries.

Graphic: Sarvesh Kumar Sharma/Mint
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Graphic: Sarvesh Kumar Sharma/Mint


But Power Grid’s capital expenditure (capex) is slowing, reflecting sluggish investments in the transmission sector. Power Grid is estimated to incur a capex of 15,000 crore in FY20, down from 25,791 crore in FY18. Since the firm earns fixed returns on commissioned projects, a slowdown in capex and project additions will crimp earnings growth.

“Industry transmission bid pipeline is 12,000 crore over the next 12-18 months vs Power Grid’s current annual capitalization of 15,000-20,000 crore. Power Grid has to compete vs private sector players, unlike earlier years when they were nominated for most projects. The company faces the risk of losing share in an already muted market pie," Jefferies India Pvt. Ltd said in a note. Another risk the company and the power sector faces is the liquidity constraints at discoms. With demand and collections hit, dues from the discoms are rising. This can stretch working capital, weighing on earnings.

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