Power Grid Corp. of India Ltd’s investors shrugged off the adverse tariff ruling on the renewable energy transmission corridor resulting in a gain of 1.8% in the stock from 9 August when the order was issued by the Central Electricity Regulatory Commission. The order limits the liability of power distribution companies (discoms) to the extent of their usage of the green energy corridor, according to JM Financial Institutional Securities Ltd.
Theoretically, the latest order crimps Power Grid’s realizations as it will have to bear the complete project cost from the date of commissioning, irrespective of the utilization levels. The tariff order pertains to the 8,900 megawatts transmission system with an estimated cost of ₹7,041 crore. Of this, around ₹2,520 crore has been approved under the regulated tariff mechanism to Power Grid.
To evacuate renewable energy from power plants that are being built in different states, the Centre approved a plan to construct a suitable transmission system, termed as green energy corridor.
On the positive side, power discoms will not be unfairly charged for the capacities they are not utilizing. This is important against the backdrop of the general slowdown in renewable energy capacity additions.
The regulator balanced the order by allowing Power Grid to delay new transmission capacities to match the renewable energy installations, said analysts at JM Financial. “Hence, we do not find any material impact on Power Grid. The approved capital expenditure will take another 18-24 months to come up and Power Grid will plan capex to match generation and thus ensure no impact to its financials," they said in a note.
Despite this, the episode is a cautionary tale for investors tracking the company’s growth trajectory.
As capital expenditure moderated from recent highs stoking growth concerns, Power Grid cited green energy corridors as a growth avenue. Given the government’s renewable energy capacity addition targets, the opportunity still exits but is not shaping up as expected, as the latest order illustrates.
Similar to NTPC Ltd, Power Grid is allowed to earn a fixed return on equity invested for the projects built under the regulated tariff mechanism. Hence, the capacity additions are crucial for growth momentum.
The firm expects to capitalize projects worth ₹20,000-25,000 crore in FY20. This is notably lower than the additions in FY16-FY18. According to Jefferies India Pvt. Ltd, the projects in hand provide enough visibility for ₹18,000-20,000 crore annual capitalization for the next two-three years. Beyond that, Power Grid will be “hit by private sector aggression in a stable to declining transmission projects’ market pie", warn analysts at Jefferies India.
Power Grid is trying to explore intra-state transmission capex and railways electrification, but has had limited success till now. Perhaps the undemanding valuations and healthy dividend pay-outs are limiting the downside for the stock, which trades at 1.5% FY21 estimated book value and offers a 5% dividend yield.