Standing tall amidst the ruins

While investors stuck in the debt-laden power generation sector are failing to see any light at the end of the tunnel, the power transmission business is seeing a lot of investor interest. The story being sold thus: Power transmission companies are expected to see a pick-up in their order book as the growth rate of transmission capacity has been lagging behind the rate of power generation. So, any ramp-up on the supply side will directly benefit the transmission companies.

During FY09–15, Power Grid's network expanded at approximately 9% annually, while state-owned networks have expanded by 3-4%. Meanwhile, generation capacity has grown at 9.5% compounded over FY07-15. In June, 2015, India had a installed capacity of 275 gigawatt. Analysts at Anand Rathi estimate that to bridge the gap between generation and transmission infrastructure, $75 billion worth of investments would be required over the next 5-7 years. To take advantage of the situation, private players are making investments in this space. For instance, Punj Lloyd recently made its debut in the transmission and distribution sector by winning two orders for rural electrification. The Adani group is interested too. Earlier this year, Adani Enterprises decided to demerge its power transmission business into a separate entity i.e. Adani Transmission.

This buzz is also reflected in the stock price movement of power-transmission related companies. Kalpataru Power, Skipper, KEC and Techno Electric have gained 11% to 70% in 2015. The big daddy, Power Grid though is down 4.5% in the same period. That, however, has not stopped marquee fund managers like S Naren and Prashant Jain from stocking up. Naren, known for his contrarian bets, just can’t seem to have enough of Power Grid. The stock features in the portfolio of all five schemes co-managed by him. Of these, at least in three schemes, exposure to Power Grid is highest. Naren’s co-managed schemes’ exposure to Power Grid stands at 47% of combined net assets.

As for Prashant Jain, he seems to have opted for a multi-play. CESC is part of all the three schemes co-managed by Jain. Of these, two schemes have exposure to Power Grid at 1.18% and 0.59% of their respective net assets. HDFC Prudence holds KEC (1.18% of net assets) and Techno Electric (0.23%). Schemes of other fund houses are also betting heavily on the transmission space. IDFC Dynamic Equity Fund and HSBC Dynamic Fund’s exposure to Power Grid accounts for 4% and 2.37% of their net assets respectively.

Given the monopoly enjoyed by Power Grid in the country’s inter-state and inter-regional power transmission network, it earns an assured return on its completed projects. The revenue certainty makes it a comparatively safer bet in an otherwise turbulent power sector. Another factor that gives Power Grid an edge over its peers in the private space is that given the complexity of large transmission projects, projects are assigned to Power Grid outside the bidding mechanism. The FY18-22 planned capex is another trigger not just for Power Grid, but also for the private sector.

In the coming days, analysts expect a re-rating of Power Grid which accounts for approximately 50% of India’s transmission capex. For quarter-ending June, 2015, the firm saw asset capitalisation to the tune of #4,600 crore. Overall, analysts expect capitalisation of #24,000 crore for FY16. “We believe better execution, improving ROE … and capex for FY18-22 – could drive a re-rating. A decline in bond yields should also improve re-rating prospects,” Girish Nair of BNP Paribas writes in a client note. Analysts say that at 9-times estimated earnings of FY17, Power Grid seems attractive with earnings expected to compound at 17.4% between FY16-18.