PowerGrid InvIT IPO Analysis

Detailed Analysis of PowerGrid InvIT IPO Analysis

Introduction:

PowerGrid InvIT owns, construct, operate, maintain, and invest in power transmission assets in India. This InvIT is sponsored by Power Grid Corporation of India Limited (PGCIL).

Detailed Review of PowerGrid InvIT IPO Analysis

1) What is InvIT?

• InvIT stands for Infrastructure Investment Trusts. They are investment instruments that work like Mutual Funds. They don’t work like Equity or Debt.
• Further, they possess high risk than debt but rewards more than the debt instrument. Also, they are lower riskier than Equity, but one should not expect higher return like Equity.
• Through InvITs, individuals can park their funds into infrastructure projects in 2 ways- either directly or through particular purpose vehicles.
• Additionally, Investors are also allowed to invest in projects that are under construction or have been finished.
• The regulation for InvIT requires them to have at least 80% of their investment in operational assets and not more than 10% in under-construction assets.
• To ensure that at least 90% of the free cash flows are distributed to the investors.

2) PowerGrid InvIT

a) About IPO:

• PowerGrid InvIT IPO is open for subscription from 29^th April and will close on 3^rd May 2021.
• The Price Band of this IPO ranges between Rs. 99 to Rs. 100.
• The Market Lot available is 1100 shares.
• Issue Size of this InvIT IPO is Rs. 7,734.99 Cr. wherein Fresh Issue is of Rs. 4,993.48 Cr. and Offer For Sale is of Rs. 2,741.51 Cr.
• The Objective of the issuance of IPO is Repayment of Debt.
• Lead Managers of this IPO are Axis Capital, Edelweiss Financial Services, ICICI Securities, HSBC Securities, and Capital Markets.
• Credit Rating of Provisional [ICRA] AAA (Stable), CARE AAA (Is); Stable and Provisional CCR AAA/Stable by ICRA Limited, CARE Ratings Limited, and CRISIL Ratings Limited respectively.
• Around 75% of the offer is reserved for Institutional Investors, of which 60% is reserved for anchor investors. Balance 25% portion will be available for allocation to non-institutional investors on a proportionate basis.
• Anchor Investors who have already Invested include famous parties like SBI Mutual Fund (MF), HDFC MF, Tata MF, Fidelity Funds, Tata AIA Life Insurance Company, Tata AIF General Insurance Company, SBI Life Insurance Company, UTI MF, ICICI Prudential MF, Sundaram MF, Rainbow Investments Ltd., and CPP Investment Board Private Holdings.

b) PowerGrid InvIT Structure:

Vision Statement:

The vision of Trust is to achieve the following:

i) a focused business model with productive and operational efficiency to enhance returns;

ii) capitalizing on value-accretive growth through acquisitions and non-transmission revenues; and

iii) optimizing transmission assets through an efficient capital structure.

Proposed Acquisition of stake in the specified SPVs by the trust.

Proposed post-listing structure:

• PowerGrid is the sponsor of the InvIT and will hold greater than or equal to 15% stake, while Public Unitholders will hold lesser than or equal to 85% stake in the PowerGrid InvIT.
• POWERGRID Unchahar Transmission, a 100% wholly-owned subsidiary of PowerGrid is the Investment Manager of this InvIT.
• IDBI Trusteeship Services (ITSL) is the Trustee of this InvIT.
• This PowerGrid InvIT is having a 74% stake in these 5 Assets: POWERGRID Vizag Transmission (PVTL), POWERGRID Kala Amb Transmission (PKATL), POWERGRID Warora Transmission (PWTL), POWERGRID Parli Transmission (PPTL), and POWERGRID Jabalpur Transmission (PJTL).

Financials:

• Currently, it is having Property, Plant, and equipment of Rs. 61,993 Cr.
• Also, InvIT which consists of 5 assets is having loans of around Rs. 49,934.84 Cr.
• The Loans of these assets are as follows:

• As of December 31, 2020, Trust has earned a total income of Rs. 10,090.81 Cr. wherein the trust generated profit of Rs. 3,371.42 Cr.
• An increase in revenue depends upon the new projects which the company can grab.

Power Transmission Industry:

• India is the 3^rd largest producer and second-largest consumer of electricity in the world. India has the 5^th largest installed capacity in the world. The current Capacity as of September 2020 is 373.02 GW.
• Per Capita Consumption of power is 1/3^rd of the global average and is expected to double in the next 5-6 years.
• Installed capacity in India has increased at a healthy CAGR of around 8% over FY16-FY20. The growth in installed capacity has resulted in a peak demand deficit declining from 10% to 0.6% over the last decade.
• The transmission sector in India is expected to grow at 8%-9% CAGR over the next 10 years.
• Various government initiatives like 24*7 power for all, Saubhagya, UDAY, Integrated power development scheme, commercialization of coal sector, etc. are expected to augur well for the sector. The government has approved 100% FDI Int his sector.
• The government has also allowed cross-border trade of electricity and currently India exports to Nepal, Bangladesh, and Myanmar, whereas it imports from Bhutan.
• Various technological changes in downstream industries like the emergence of Electric Vehicles in the upcoming times are expected to increase electricity consumption.
• The transmission network in India has grown at a muted CAGR of around 6% over the last 5 years and registered a low growth of 2.8% in the previous year.

PowerGrid InvIT-Positives:

• Predictable earnings with long-term contracts of 35 years.
• Strong lineage and support from our Sponsor- Fast Growing Promoter.
• The Transmission charges for each Initial Portfolio Asset are contracted for the period of the TSA, which is 35 years from its respective Scheduled COD.
• Power Transmission projects are strategic and critical assets since they operate vital links in the power supply value chain.
• Cabinet Committee on Economic Affairs, while approving the Sponsor for monetization of the Initial Portfolio Assets through the InvIT route, has also permitted the sponsor to monetize, through the InvIT route, its other subsidiaries, which are either under construction or shall be acquired by it in future, as per the directives and targets fixed by the Government of India.
• PowerGrid has 18 projects with Rs. 22,50 Cr. investments which are under construction. They would be offered to InvIT in the future.
• High Entry Barriers.

PowerGrid InvIT- Negatives:

• Under the InvIT Regulations, the Trust is required to distribute not less than 90% of its net distributable cash flows to the Unitholders. To expand our portfolio of projects through acquisitions, and primarily rely on debt and equity financing.
• Risk of natural disasters.
• Adapting to technological changes.
• Conflict of interest for Investment Manager and Project Manager.
• Tough to change Investment Manager and Trustee.
• PSU Management.
• Payment delays from customers.

3) Comparison with IndiGrid InvIT:

IndiGrid InvIT:

• IndiGrid InvIT is the first private sector InvIT which launched in 2017 and was sponsored by Sterlite Power.
• This InvIT was having 2 Initial Portfolio Asset and was also rated ‘AAA’.
• Further, in 2018, they acquired 3 assets from Sterlite Power and 1 asset from Techno Electric.
• KKR, a US-Based private equity firm, GIC, Wealth fund of Government of Singapore has bought around 23% and 20% respectively.
• Also, this trust acquired 2 more assets worth Rs. 50 billion.
• Now, in 2020, KKR became the sponsor and announced the acquisition of 5 assets worth INR 40 billion including the first intra-state, first cost-plus, first solar asset.
• By 2022, they aim to be the most admired yield vehicle in India and to maintain AAA-rated cash flows.

IndiGrid Returns:

• IndiGrid InvIT has given returns of around 14% YoY as of December 2020.
• NAV of the InvIT has also increased by 20% from Rs. 120 to Rs. 126
• Having lower beta.

Difference between PowerGrid & IndiGrid:

PowerGrid is smaller in size as compare to IndiGrid in terms of transmission lines and substations as IndiGrid is a big player in this industry.

4) Valuation:

• Listed Companies such as Sterlite Powe-sponsored IndiGrid is trading at a 9% yield with a 9% premium to its NAV Value.
• For PowerGrid InvIT expected distributable cash flow of about Rs. 1,150 r. annually which gives an 11% yield.

Conclusion:

Infrastructure Investment Trust (InvIT) is a different asset class. It is neither a proper debt class and nor an equity class. An Investor looking for such kind investment avenues should invest in this IPO but with due diligence. One should consult his/her financial advisor before making any investment.