Will Power Grid benefit if it acquires PFC's stake in REC?

Amid media reports stating that the government is discussing a plan for PFC to sell its 53% stake in REC to Power Grid Corporation, domestic brokerage firm Antique Stock Broking on Monday said the PSU may end up earning an 11% dividend on this move.

"Power Grid is entering into a cash-rich mature asset ownership stage, with limited growth potential in the conventional transmission space. So, hypothetically, if REC is acquired closer to CMP or PFC's acquisition price of March 2019, Power Grid may end up earning an 11% dividend," the brokerage firm said.

While the acquisition price is unknown, REC's current market price is closer to PFC's acquisition price paid in 2019. Moreover, REC is meeting CPSE guidelines for dividends, it said.

"For a company that generates Rs 24,000 crore plus in OCF with limited capex plans, funding the REC acquisition will not be a difficult task. With borrowing cost near sovereign yields level, Power Grid can effectively leverage the acquisition for a 20% plus IRR proposition," it added.

Power Grid is the best proxy to play tariff-based competitive bidding (TBCB) opportunities, it added.

"For an RoE profile of 15.5%, the justified PB is 1.46x. This assumes 13.5% as the cost of equity and a 6% sustainable growth rate. With investments/ CWIP at a discounted value, we assign a target price of Rs 257 and reiterate buy recommendation,” said the brokerage firm.

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