IDGC South: revenue doubled on tariffs and grid connections, but free cash flow turned negative on construction

On August 27, Rosseti South reported Q2 2026 results: revenue rose 153.8% YoY to RUB 45.2 bn, EBITDA grew 254.2% to RUB 8.6 bn, and net profit surged 719.6% to RUB 2.5 bn. Growth was driven by tariffs and grid connections, but capex for the half-year nearly tripled operating cash flow, pushing free cash flow negative. We examine what stands behind the record figures and why investors remain cautious on dividends.

Key takeaways

— Revenue doubled on tariffs and grid connections: electricity transmission grew 2.5x

— EBITDA margin jumped to 19.0% from 13.6% a year earlier – operating leverage worked on growth

— Net profit grew 8x, but half is the effect of a low base and one-off income

— Capex for the half-year reached RUB 15.8 bn – almost three times operating cash flow, free cash flow negative

— Debt rose by RUB 16.0 bn over 12 months to RUB 39.4 bn, but debt/EBITDA is only 0.91

— Dividends: RUB 0.0038 per share paid over 12 months, yield 5.8%, but the model sees fair yield at 10.5%

— Valuation: P/E 4.0 and EV/EBITDA 2.8 – well below its own three-year average, but the reason is growth, not cheap shares

Key figures, RUB bn

Revenue doubled on tariffs and grid connections: electricity transmission grew 2.5x

In Q2 2026, IDGC South's revenue reached RUB 45,193 mn, up 153.8% YoY. The main contributor was electricity transmission – RUB 40,703 mn versus RUB 16,484 mn in Q2 2025, a 2.5x increase. This is a direct result of tariff indexation and higher useful supply.

Grid connections brought RUB 2,975 mn versus RUB 435 mn a year earlier – a 6.8x jump. Electricity and capacity sales grew modestly, from RUB 402 mn to RUB 438 mn. Other revenue doubled to RUB 994 mn, but its share remains small.

For H1, revenue reached RUB 95,424 mn versus RUB 38,171 mn in H1 2025. Quarterly dynamics show the acceleration is not one-off: Q1 2026 growth was 146.7%, Q2 – 153.8%.

EBITDA margin jumped to 19.0% from 13.6% a year earlier – operating leverage worked on growth

EBITDA for Q2 2026 grew 254.2% YoY to RUB 8,573 mn, while revenue rose 153.8%. As a result, EBITDA margin climbed to 19.0% from 13.6% in Q2 2025. Operating expenses grew slower than revenue: personnel costs for the half-year doubled to RUB 15,020 mn, while revenue increased 2.5x.

In the segment breakdown for the quarter, the Kubanenergo branch generated EBITDA of RUB 7,066 mn – 78% of the group's total. Rostovenergo added RUB 913 mn, Astrakhanenergo – RUB 528 mn. Other segments contributed less, and 'Other' posted a loss of RUB 1.8 mn.

The margin expansion is explained by the fact that a significant part of costs – personnel, network maintenance – is semi-fixed. With revenue doubling, they only doubled, providing operating leverage.

Net profit grew 8x, but half is the effect of a low base and one-off income

Net profit for Q2 2026 reached RUB 2,451 mn versus RUB 299 mn a year earlier – an 8.2x increase. However, the base was extremely low: in Q2 2025 net profit barely exceeded zero due to weak operations and high finance costs.

The half-year report shows one-off income: compensation for losses on disposal of grid assets – RUB 388 mn, insurance compensation – RUB 140 mn, income from non-contractual consumption – RUB 80 mn. Together this is about RUB 608 mn, or 8% of half-year net profit of RUB 7,420 mn.

Finance costs for the half-year rose to RUB 4,086 mn from RUB 2,426 mn a year earlier, but profit growth still outpaced expense growth. Income tax amounted to RUB 3,097 mn versus RUB 688 mn – an effective rate of about 42%, higher than nominal due to non-deductible expenses.

Capex for the half-year reached RUB 15.8 bn – almost three times operating cash flow, free cash flow negative

For H1 2026, capex reached RUB 15,815 mn, while operating cash flow was only RUB 7,300 mn over the last 12 months and RUB 11,271 mn for the half-year. The gap was covered by borrowings: loan proceeds for the half-year – RUB 31,159 mn, repayments – RUB 27,993 mn.

Free cash flow (operating cash flow minus capex) for the half-year is negative: minus RUB 4,544 mn. This means the company is spending more on its investment program than it generates operationally. Cash on the balance sheet barely changed – from RUB 18,129 mn at the start of the year to RUB 18,598 mn at the end of the half-year.

The rise in capex is related to the investment program: property, plant and equipment increased from RUB 154,956 mn at end-2025 to RUB 162,699 mn at June 30, 2026. This is typical for a grid company during active infrastructure renewal, but it pressures liquidity.

Debt rose by RUB 16.0 bn over 12 months to RUB 39.4 bn, but debt/EBITDA is only 0.91

Net debt at June 30, 2026 stood at RUB 39,376 mn, up RUB 1.2 bn quarter-on-quarter and RUB 16.0 bn over 12 months. The debt increase is a consequence of the active investment program: RUB 31.2 bn of loans were raised in the half-year, RUB 28.0 bn repaid.

Net debt to EBITDA for the last 12 months is 0.91. This is a moderate level for a grid company, especially given EBITDA growth: over the last 12 months it reached RUB 24,739 mn, almost three times higher than a year earlier.

Interest expenses for the half-year rose to RUB 4,086 mn from RUB 2,426 mn, but thanks to profit growth, the interest coverage ratio (EBITDA/interest) remains comfortable – around 5x over the last 12 months.

Dividends: RUB 0.0038 per share paid over 12 months, yield 5.8%, but the model sees fair yield at 10.5%

Over the last 12 months, IDGC South paid dividends of RUB 0.0038 per share, giving a current yield of 5.8%. However, our model estimates a fair yield for this stock at 10.5% – a signal that the market demands a higher risk premium.

Our model's next payout estimate is RUB 0.0 per share, corresponding to a forward yield of 5.9%. This means we do not expect a significant increase in dividends in the coming year, despite profit growth.

The payout ratio is only 0.07 of profit – the company allocates just 7% of net profit to dividends. The rest goes to the investment program and debt repayment. Under this policy, the dividend yield is unlikely to exceed current levels.

Valuation: P/E 4.0 and EV/EBITDA 2.8 – well below its own three-year average, but the reason is growth, not cheap shares

Over the last 12 months, P/E stands at 4.0, and EV/EBITDA – 2.8. The three-year average EV/EBITDA for this stock is 5.96, meaning the current multiple is almost half its own history.

Low multiples are a consequence of the sharp growth in profit and EBITDA over the past year, not a fall in market capitalization. Market cap is RUB 46,417 mn, only slightly above net profit for 12 months (RUB 11,607 mn).

ROE is 11.2% – a moderate level for a grid company. If profit growth continues, multiples may remain low, but this rather reflects market expectations of a slowdown after the rapid tariff growth.

Valuation on the latest reported figures

Bottom line

The report is strong: revenue and profit grew several-fold, margins expanded, and debt burden remains moderate (0.91 EBITDA). But behind these figures are the low base effect and one-off income, and crucially – capex that is three times operating cash flow. The company is financing its investment program with borrowings, and debt is growing faster than free cash flow generation. For shareholders, the key question is not profit growth, but when the company will start converting it into dividends: at the current payout of 0.07 of profit, the yield is unlikely to exceed 5.9%, below the fair estimate of 10.5%.