POWERGRID — earnings call

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Prepared remarks

Moderator · Conference Operator

Bhavin, please go ahead.

Bhavin

Thank you for the opportunity.

Sir, I have three questions.

First is, during the IPO of the InvIT, in your media interactions, you had highlighted that there will be 18 additional projects of ₹22,500 crores which will be sold to the InvIT.

We haven't seen any movement on that.

So, what is the status now and why the delay?

CMD

We said that’s the pipeline which would be available, but post the National Monetization Pipeline, there has been a change in the stand.

Now the guidelines require us not to transfer ownership, but only rights to the cash flows.

So, we are adopting the Securitization route rather than Monetization through transfer to InvIT.

So that is why assets are not going to the InvIT at present.

Bhavin

Okay, so will it be the case that POWERGRID kind of aims for the TBCB assets.

And will the InvIT have to learn and find the assets individually itself?

CMD

I won't talk for the InvIT, but I am talking as far as POWERGRID is concerned.

We are looking to raise funds at the optimal cost, and in terms of the government framework, asset transfer, ownership transfer is not permitted.

So, if we do cash flow transfer through the InvIT route, it's not working out.

There are tax implications and value decretive to the shareholders.

So, we have observed that the Securitization route of raising debt on the strength of the TBCB cash flows is compliant with the NMP framework and is also optimal fund raising for POWERGRID.

Bhavin

Second, if you could talk about the competitive landscape in the recent bids of TBCB?

CMD

Yes, so we are observing that for smaller ticket size projects say less than ₹1000 crores, there are seven-eight bids received.

For Larger ticket projects say ₹2000 crores plus, four or five bids are received.

Competition remains very intensive.

There is no let down in that.

Bhavin

Incrementally, we are seeing the size of the project is rising.

Then there are a couple of HVDC also.

What is your expectation of equity IRRs?

Can we expect mid-teens or it's early double-digits?

CMD

Mid-teens will not be there even in a regulated environment.

So, I think early double-digits can be a fair assumption.

Bhavin

Great.

Last question is we are seeing very tight supply chain on equipment supply, especially globally and we have seen increase in the prices also because U.S., Europe is going very strong on the HVDC and transmission, how is that impacting the supply chain and the pricing for us?

CMD

You are very right about supply chain constraints in the HVDC space.

Due to the renewable energy integration in the West, there has been a significant spike in the demand for HVDC and cables.

The timelines, what has been asked in the NCT approvals, we are finding will also be a challenge.

So, we are taking up with the government that these timelines are not possible to adhere to, given the supply chain constraints.

As far as pricing is concerned, since these are TBCB projects where we would like to have some understanding with the equipment manufacturers, and we would like to build that into our pricing.

And challenges will be there because of the large size of the project and the variables which are there in terms of exchange rate variation, in terms of price escalation.

So, these are indeed challenges which need to be factored in when we make our quote.

Bhavin

Just last question.

The draft regulation will be there sometime in November, December and final in February, March.

What are your expectations for the regulated assets?

CMD

The approach paper of the staff is out.

I think yesterday we have submitted our comments on it.

From the discussion paper, though there have been several alternatives proposed, there is a fair degree of emphasis on regulatory certainty and there is also a suggestion to grandfather the provisions for existing assets and any changes can be taken up for the new assets.

I think this is a good approach which is given in that paper.

And what we would like to have is continuation, because as far as transmission tariffs are concerned, much of it is on normative basis, so there is not much to change.

May be, making it more easy to do other businesses will help.

For example, we have land at several locations, if that land can be better utilized for setting up solar or other business and that process is simplified, it will help.

Bhavin

Thank you so much for taking my question.

Moderator · Conference Operator

Thank you, Bhavin.

Next question is from the line of Anuj Upadhyay.

Anuj, please go ahead.

Anuj Upadhyay

Thanks for the opportunity.

Sir, the center had approved around ₹75,400 crores of power transmission projects and the TBCB, any timeline by when they would be out for a bidding?

CMD

They are already bidding; large numbers are already in bidding.

Some ₹55,000 crore bidding is under bidding right now.

Anuj Upadhyay

₹55,000 crores sir, right?

CMD

₹21,000 crores has been concluded, ₹55,000 crores is under bidding.

Another ₹81,000 crores is to be floated by the BPCs.

So, the pipeline is pretty robust.

Anuj Upadhyay

Okay.

And the trajectory which you provided on overall ₹1,71,000 crores of CapEx on the transmission space, you mentioned that probably FY '24 and '25 we may see CapEx in the range of ₹10,000 crores to ₹12,000 crores.

So, would it be fair to assume that FY '26 onwards, we may see ₹20,000-25,000 crores kind of a CapEx to be incurred at PGCIL level or it would be at a further I mean at a later date, sir, say FY '27-'28 onwards, any timeline which you can throw would be helpful?

CMD

I think '25-'26 is a fair timeline to see that kind of that up.

Anuj Upadhyay

Okay, that's fair sir.

That's it.

Thanks for the opportunity.

Moderator · Conference Operator

Thank you, Anuj.

Next question is from the line of Puneet.

Puneet, please go ahead.

Puneet

Thank you so much.

My question is on your ₹81,000 crore projects, which you said are likely to be floated and up for bidding, what kind of certainty can we assign that this will be up for bidding?

Is it only a procedural method, or does the government need to do more to convert it into bidding?

CMD

Sorry, I couldn't get your question.

Puneet

Sorry, the ₹81,000 crore project, which you said will be floated and up for bidding, is it only a procedural matter that it gets converted into tenders, or are there further steps that the government needs to take converted into tenders.

CMD

I would say, procedural level.

These are schemes which have been approved.

They will be floated by the BPC.

These have been approved by the NCT, and as per the requirement of the renewable energy projects, this will be implemented.

Puneet

So, what kind of timeline can we assume here for ₹81,000 crores?

CMD

I think for these to come to bid, maybe one, one and a half years maximum.

Puneet

On your smart metering project, now that you bid out everything, what kind of IRRs would you be looking at?

CMD

Yes, here we can look for mid-teens.

Puneet

Here it is mid-teens.

Okay, that's great.

That is all from my side.

Thanks.

Moderator · Conference Operator

Thank you, Puneet.

Next question is from the line of Nikhil Abhyankar.

Nikhil, please go ahead.

Nikhil Abhyankar

Good morning Sir.

Thanks for the opportunity.

So, a lot of states are coming out with Intrastate opportunities.

So, what is the opportunity size over there in the medium term?

CMD

As we have shown in our presentation, we are looking to about ₹37,000 crores in the next eight to nine years.

Intrastate is difficult to predict in terms of the flow pipeline.

Interstate is much more forward- looking and action is there, but intrastate because so many states are involved and each has its own pace of working.

So, it is difficult to project.

Nikhil Abhyankar

Okay.

And sir we have also projected CapEx of ₹15,000 crores for smart metering over the nine years.

So, what is the share of this Gujarat order over the next two years and have we finalized any smart meter supplier for it?

CMD

Yes, the vendors have been finalized.

We are going to do 69 lakhs.

That is the initial estimate for the numbers.

And that has a CapEx of about ₹4,100 - ₹4,050 crores or so.

And we look to increase more because this is part of the first 10 crore meters.

Overall the meter size is about 25 crores.

So, we look forward to increasing this market share.

Both through our own as well as through our joint venture EESL.

They are also doing projects.

Nikhil Abhyankar

Understood.

So, should we expect another ₹10,000 crores of CapEx towards smart metering in the next, say two to three years?

CMD

Yes, two to three years may be a little aggressive, but it will be next say five years.

Nikhil Abhyankar

Okay Sir.

Thanks a lot.

I'll join back in the queue.

Moderator · Conference Operator

Thank you, Nikhil.

Next question is from the line of Swathi.

Swathi, please go ahead.

Swathi

Yeah, hi, thank you for taking my question.

Yeah.

You have indicated your size of Capex is 1.1 trillion plans for the next 10 years, whereas in an audio call you had indicated that the total CapEx opportunity size is 1.9 trillion in the Inter State transmission.

So, does that imply a 61% market share going ahead?

CMD

Not necessarily.

Some will be RTM projects, which we expect to get.

And also, definitely we are right now around 50 plus, 55%-57% depends on where you take the cut.

So, we look forward to definitely maintain, if not increase our market share.

But it's not a very significant increase, which we are projecting compared to where we are today.

Swathi

All right, and on the second one, the international projects that you're talking about ₹7,500 crores, can you elaborate on which countries you're looking at, and maybe if you can update on the Kenya 250 million and the Tanzania 400 million projects that you have spoken about?

CMD

So those are the two main ones we are looking at.

Kenya, we are submitting the final proposal this August.

We have received the in- principle approval for the PPP project.

And we are going to submit the development report this month.

Tanzania is still at initial stages.

And we have been now sounded of an opportunity in Nigeria.

So, in the African continent, we are looking primarily through the Africa 50 alliance opportunities.

And then there is also the Katihar-Parbatipur-Bornagar line, the Bangladesh portion of this will also be implemented as a joint venture.

That is the discussion right now going on.

Future interconnections with Nepal, the Nepalese portion is also envisaged to be taken up through joint ventures with the NEA, Nepal Electricity Authority.

So, these are some of the opportunities which we are seriously evaluating at this point.

Swathi

Understood.

And just one last question.

So, can you give a year-wise bifurcation of 1.83 trillion in CapEx that you have planned out for the next 10 years, if that's possible?

CMD

Year-wise bifurcation at this point we cannot give you, because that is a function of the pipeline.

How quickly we get and that again will be depending on the pace of the RE project development.

So, at this point, it will be difficult to give you year wise breakup.

Swathi

I just wanted to understand, will it be more front loaded or more back loaded?

CMD

As I mentioned to another question, from '25-'26 onwards there will be a significant increase in the pace.

Swathi

Okay.

Thank you so much.

Moderator · Conference Operator

Thank you, Swathi, next question is from the line of Dhruv Muchhal.

Dhruv please go ahead.

Dhruv

Hi, Sir, Dhruv from HDFC.

Sir, you mentioned that there are ₹55,000 crores of projects, which are currently under bidding and ₹81,000 which will come up in the next one to one and a half year.

Probably there will be more given the run rate at which NCT is approving the projects.

So, your CapEx guidance is that it will not cross beyond ₹20,000 crores.

In that sense, it seems conservative, 50%-60% market share that you can.

So, we just wanted.

CMD

Sorry, Dhruv we are not able to hear you clearly.

Dhruv

I'll try again sir.

We have projects of about ₹55,000 crores which are currently under bidding?

CMD

Right.

Dhruv

And ₹81,000 crores which will come up in the next one to one and a half year.

CMD

Right.

Dhruv

And probably there will be more, given, what the run rate at which NCT is approving projects.

So, my point was that ₹20,000 crores, the CapEx run rate that you have mentioned that it will achieve for the next, say, FY '26 or '27.

Does that become a very conservative given typically you have got 50%-60% market share in projects?

CMD

No, I won't say conservative.

See, part of it stems from say, for example, this year we have targeted ₹8,800 crores initially, but then this is definitely going to cross, because there is now a larger set of projects under execution.

Next year, also it will be higher.

So, ₹25,000 crore by 25-26, as I mentioned, is a fair estimation.

Because when the project is approved, you get nowadays about two years and larger projects about four years to execute.

The HVDC project, for example, will need four years to implement.

So, if you take ₹25,000 crores, ₹24,000 crores, then it will only add ₹6,000 crores to the annual CapEx.

And that too will be like second, third, fourth year there will be more CapEx.

First year will go in designing.

So, I think on an average, peak can be ₹25,000 crores.

You will be somewhere around ₹17,500 to ₹20,000-₹22,000 crores.

That is the kind of numbers one can estimate are the rough ballpark kind of numbers.

Dhruv Muchhal

Sir given that a lot of projects are coming in a very short span, say in the next one to three years, is it fair to say that the opportunity to capture more market share is also higher, because the number of executors is relatively low?

CMD

No, it is not.

You will try to see how to capture the market share and all that is a different issue.

But even if we take for example, having made all this assessment, we have given this number of ₹1,16,000 crores as our CapEx for the interstate transmission.

So, if you take it over the next nine years, it will come somewhere around ₹13,000 crores annually.

So, any project will be about what two years.

It will take two years to complete a project.

CapEx will be at least over 24 to 30 months.

So, I am not very confident that annual CapEx will exceed ₹25,000 crores.

Dhruv Muchhal

Got it.

Sure, sir.

Thank you so much.

That helps.

Thank you.

Moderator · Conference Operator

Thank you, Dhruv.

Next question is from the line of Vipul Kumar Shah.

Vipul, please go ahead……..

We will move on to next question from Puneet.

Puneet, please go ahead.

Puneet

Thank you so much for the follow-up.

On your guidance of ₹1,16,500 crore of Interstate CapEx.

What is the opportunity size that you assume?

CMD

The opportunity is the entire 500-gigawatt related transmission which is planned.

So that itself is about ₹2,44,000 crores or so, that is there.

Puneet

So out of ₹2,44,000 crores, ₹1,16,000 is your market share.

How I should think about that?

CMD

Out of ₹2,44,000 crores, some has been already started for implementation and so on.

So roughly, you can say that we have taken around 50% plus market share.

Puneet

And you said this is dependent on the 500-gigawatt commissioning.

So, if that number were to get missed, is there a risk that the transmission capacity can also get deferred?

CMD

I think the entire government is committed to 500-gigawatt, 50% non- fossil by 2030.

So, at this point, I will not subscribe to the view that it can be missed.

It will be one year ahead or one year later.

But as such, there is no risk to that target.

Puneet

Understood.

That's all.

Thank you so much.

Moderator · Conference Operator

Thank you, Puneet.

Mohit, would you like to ask the questions in the chat?

Mohit Kumar

There are some questions in the chat, so I'll just start with the first one, which has come from Koundinya from JPM.

The question is, if you can provide some color on the bidding timelines for the three HVDC projects.

CMD

For one project Fatehpur-Bhadla, the bid is already out and timelines have been given.

I think September is the target for selection of the bidder.

The other projects we are yet to see.

But hopefully in the next six months or so, we should see those also out in the market.

Mohit Kumar

The second question is from the chat box on the Raigarh-Pugalur project.

He is asking that we thought the receivable issue was resolved post Q4 FY '23.

Can you please comment on the same?

CMD

The tariff has been notified by the CERC under the CERC sharing regulations, which provide 30% of the tariff to be included as a National Component distributed over all the licensees, I mean DISCOMS and the rest 70% to be borne by the Southern Beneficiaries, because it is meant for the Southern Region.

Now, Tamil Nadu has taken up that this should be declared as a National Asset, entire 100% should part of the National Component.

They are drawing reference to the Biswanath Chariali system which was included as a national asset and also to the fact that this system is now facilitating flow of renewable energy from Southern Region to Western Region.

So, the Central government has recommended this to the CERC.

POSOCO, the Grid-India and the CTU have also recommended because of the bi-directional flows.

CERC went by the sharing regulations and ordered that the sharing should be 30:70 only.

So, aggrieved Tamil Nadu has gone to APTEL, when APTEL has remanded back this matter to the CERC in one element.

There were four orders for the total Raigarh system, four Elements, four Orders were there.

So, one Order has been remanded back to CERC for the three other elements also the hearing is tomorrow, more likely that they all will be remanded back to CERC.

So, the current position is that the tariff order has been set aside until the CERC decides afresh.

So, I believe that the tariff as such will have to be paid if not in this ratio, some other ratio.

There will be some lag in collection, that's all.

Mohit Kumar

The third question is on the CERC tariff regulation.

The approach paper for the next control period speaks of differential and potentially lower tariffs.

Can you help us understand the way discussion are going here and if there is any cut to the base RoE?

CMD

So, the discussion paper has talked of a differential.

Now differential can be that you make the other higher.

There is no need to make one smaller to make the other look bigger.

So, if you feel hydro, this has been done in the last tariff also that hydro was given a little higher.

If you feel that it is still not compensating the hydro, you need to give more, please do go ahead, no worries.

But you don't have to cut for the transmission sector to make the other look big.

I don't think cutting transmission tariff will any way increase the profits of the hydro investors.

We have given our views.

And given the current interest regime and the construction risk profile with increasing RoW, the return which is there currently, is a fair return in our view.

Second, the approach paper also talks of grandfathering, i.e, the new regulations to apply to assets commissioned after the new regulations have come into force.

So, I think at this point of time, there are only some points for discussion.

When the draft regulations come, there will be a little bit more clarity on the views of the Commission because at this point these are views of the staff, they are not the views of the Commission.

In the Transmission Sector.

I would not read too much into this approach paper in terms of reducing the rate of return or anything.

Mohit Kumar

The last question comes from Bharanidhar Vijayakumar from Spark Capital.

The question is what is the revenue model in smart metering?

What is the initial cost we incurred and then the cost per year during O&M and revenue per year during O&M?

Also, what is the likely return or IRR in the smart metering investments?

CMD

The revenue model is that we will be paid per meter per month.

So, for the domestic or for HT and feeder meters different rates are quoted and we will be paid per meter per month by the DISCOMS.

Our payment to our vendors are in two parts.

One part is for the meter assets.

So, it is linked to the installation and commissioning and then we will be paying them per meter per month again for the O&M expenses.

So, it is a kind of turnkey that they also have to adhere to in terms of the service level agreements and recoveries.

Also, there is a fair degree of back-to-back arrangement.

As far as investment is concerned, as I mentioned in the CapEx phase we envisage to incur about ₹4,000 crores investment for these 69 lakh meters.

The RoE expectation is mid-teens from this project.

Mohit Kumar

Yes, I think we have reached to the end of the call.

I don't think there's any further queue.

Thanks to the management for giving us the opportunity to host the call.

Would you like to make any closing remarks?

CMD

Thank you so much.

I think the business looks much more robust and with a very strong pipeline approved and in bidding available.

I think compared to where we were a year back, the situation is much more clear, and the processes for approval of projects have also been simplified.

More delegation has been given to the NCT and the CTU.

So, business looks good.

Operational performance has been strong.

That is where I would like to conclude.

Thank you so much for joining the call.

Mohit Kumar

Thank you, everybody. *****

Questions and answers

16:41:49 +05'30' · Research Analyst

Power Grid Corporation of India Limited