Shares of Power Grid Corp. of India Ltd have underperformed over the last two years, as the moderation in investments in the transmission sector resulted in a slowing down in order flow for the company.

Compared to a 5.9% gain in the Nifty 500 index, the Power Grid stock lost 7% in the last two years. As a result, price-earnings valuations have fallen below 10 times, and the stock has a dividend yield of 5%.

But things are gradually picking up. Last week, the company said it won two intra-state transmission system projects under tariff-based competitive bidding.

Power Grid did not reveal the project values. But an earlier communication with investors pegs the project wins so far in FY20 at ₹10,030 crore, with the value of total projects in hand adding up to ₹66,000 crore.

Encouragingly, the company won seven of the 13 project bids it has participated in, implying a win rate of more than 50%.

This should assuage investor concerns about Power Grid’s ability to win in competitive project bidding.

According to the company, the aggregate annual levelized tariff stands at ₹666 crore for the ₹6,599 crore worth of projects it won under the competitive bidding route.

In FY19, Power Grid derived superior returns from the operating projects it won under competitive bidding compared to the returns it would otherwise have made under the regulated business model, shows an analysis by SBICAP Securities Ltd.

This was made possible by low funding costs and Power Grid’s execution capabilities.

Expertise in transmission projects is helping the company execute projects at lower capex (vis-à-vis the stipulated levels), helping it optimize returns.

Of course, there are projects which have seen cost overruns. But there are more hits than misses till now. The company’s capex target for FY20 is lower than the previous two fiscal years, which analysts say point to prospects of better returns on projects.

“For these projects, to earn the threshold returns, it is imperative that they are executed at 45-60% of the original estimated cost. Power Grid has, in the past, been able to implement projects at a fraction of the estimated capex," analysts at SBICAP Securities said in a note.


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