Bank of America Securities (BofA) has downgraded Power Grid stock, changing its rating from 'buy' to 'underperform'. Despite this downgrade, BofA has maintained the target price for the stock at Rs 259. The decision to revise the rating is primarily based on concerns regarding the return on equity (RoE) for Power Grid.
BofA Securities has outlined three key reasons in their report that contribute to their apprehension about Power Grid's RoE. Firstly, the firm conducted comprehensive checks regarding this with the power ministry and regulators. The feedback that received suggests that RoEs are likely to be curtailed in the power sector due to its maturation. Additionally, the majority of the sector's capital expenditure requirements have already been met.
Secondly, Power Grid's increased involvement in tariff-based competitive bidding projects could potentially dilute their RoEs in the future. This expansion into new projects may not yield the same levels of profitability, negatively impacting the company's overall performance.
Lastly, BofA Securities points out that Power Grid's new business ventures might also lead to a dilution of RoE. These ventures, while contributing to the company's diversification, may not generate the desired returns in the short term.
Based on these concerns, the brokerage has now decided to downgrade Power Grid stock. They also believe that the government's current stance does not necessitate incentivising investments, further adding to the negative outlook for Power Grid. In addition, the current valuations of the stock are not supportive, which adds to the rationale behind the downgrade.
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(Edited by : C H Unnikrishnan)
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