Goldman Sachs initiates coverage on Power Grid and Hitachi Energy with a ’buy’ rating; here’s why

Global brokerage firm, Goldman Sachs, in its recent note, highlighted the crucial role of power transmission in India's energy transition and global new energy cost leadership ambitions.

The brokerage highlighted the country's large and well-integrated grid, which enables the utilisation of renewable generation sites at the lowest cost. By ensuring free access to the central grid for renewables, the government indirectly supports renewable projects, estimated at approximately US$270 billion, it said.

Goldman Sachs argued that investing in surplus transmission infrastructure for renewables is economically viable, as the benefits from the energy transition are expected to outweigh the incremental network costs. 

Accordingly, the bank estimated India's power transmission capital expenditure requirement to exceed US$500 billion by FY50E, constituting about 30% of the total energy transition capital outlay.

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Against this backdrop, Goldman Sachs identified Power Grid Corporation of India (PGCIL) as the largest beneficiary, expecting it to capture a significant portion of the estimated grid total addressable market (TAM) between FY24–50E, representing one-third of India's overall energy transition TAM. 

It pointed out that the company's robust balance sheet, low cost of debt, and strong annual free cash generation position it favorably to capitalize on the TAM estimate. Additionally, it said that the company benefits from direct nomination for executing large, complex, multi-region projects, particularly as India prioritizes cross-border grid interconnections.

Goldman Sachs forecasts a 2% earnings CAGR over FY23–26E, driven by approximately 3% regulated equity CAGR and a 20% profit CAGR from auction-won projects. Thus, it initiated coverage on PGCIL with a 'Buy' rating and set a 12-month SoTP-based target price of ₹355 per share.

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Hitachi Energy

In addition, Goldman also initiated coverage on Hitachi Energy India, highlighting the company's strategic positioning as a primary beneficiary in the upstream manufacturing sector amid India's energy transition. Hitachi Energy boasts technological leadership in high-voltage equipment and possesses highly indigenized manufacturing capabilities.

It identifies several tailwinds that could propel Hitachi Energy's growth trajectory, including grid digitalization, a global shortage of transmission equipment, and global supply chain diversification.

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It pointed out that transmission equipment stands out as one of the sub-segments in which India exhibits advanced manufacturing capabilities, supported by a robust ancillary supply chain and limited dependence on China for input imports.

Goldman Sachs anticipates that Hitachi Energy stands to benefit significantly from its estimated US$105 billion grid capital expenditure forecast for FY24–32E, with a total addressable market (TAM) potentially reaching US$50 billion. 

Additionally, the company could explore opportunities beyond the grid sector, such as electrolyzer manufacturing and renewable energy evacuation, contributing to an estimated TAM of over US$20 billion.

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It has given a 'buy' rating for the stock with a target price of ₹8,250 per share. 

Schneider Electric Infrastructure

On the flip side, Goldman Sachs initiated a ‘sell’ on Schneider Electric Infrastructure with a 12-month target price of ₹470 apiece, citing a sharp run in share price in recent months. 

"We see Schneider as a potential beneficiary of the imminent pick-up in power distribution capex and the large energy efficiency opportunity, 375% rise in share price over the last 12 months has driven valuation to 57x FY26E P/E, which appears expensive considering we expect the company's RoCE to remain sub-30%," said Goldman Sachs. 

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The Indian government initiated the Revamped Distribution System Scheme (RDSS) to reform the power distribution sector. The scheme comprises financial support for prepaid smart metering, system metering, and distribution infrastructure upgrades, along with training, capacity building, and other supportive activities. 

RDSS is anticipated to stimulate a US$37 billion capital expenditure in distribution system expansion and strengthening over the next five years. Presently, projects totaling US$14 billion have been sanctioned under the scheme, with Schneider Electric Infra (SEIL) expected to participate in over 50% of the total capital expenditure, according to Goldman Sachs.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.