In line with the government’s target of reaching close to 500 GW of installed generation capacity from renewable energy sources by 2030, power advisory body Central Electricity Authority (CEA) has estimated investments to the tune of ₹2.4 lakh crore in the power transmission space till 2030. If investors want to take advantage of the prospects for the power sector in a less risky manner, they can accumulate the shares of Powergrid Infrastructure Investment Trust (PGInvIT).
PGInvIT, through its nature of projects, can ensure more stable cashflows than InvITs present in other projects. This, along with other defensive characteristics such as investments in already cash-generating projects and an attractive pre-tax yield of around 10 per cent, makes PGInvIT an attractive investment option. The yield is quite similar to that of its peer IndiGrid. However PGInvIT invests only in transmission projects while IndiGrid also invests in certain generation projects along with transmission.
PGInviT owns and operates five inter-state power transmission assets and is sponsored by India’s largest transmission utility Power Grid Corporation (PGCIL). The sponsor (PGCIL here) is responsible to set up the trust (InvIT) and take up a minimum of 15 per cent stake in the trust and minimum of 25 per cent shareholding in the special purpose vehicles (SPV) till a stipulated time period. The InvIT invests in these SPVs in the form of debt and equity. As and when the SPVs earn cashflows, they pass it on to the InvIT. This is called the net distributable cash flows (NDCF) at the InvIT level. The InvIT inturn passes on a portion of NDCF (minimum 90 per cent) to the investors in the form of distribution, which can be categorised as interest or debt or capital repayment depending on how the InvIT got these cash flows from SPVs.
These five special purpose vehicles (SPVs) were acquired by the InvIT from the sponsor PGCIL using its listing proceeds. These transmission assets were awarded to PGCIL on a tariff-based competitive bidding (TBCB) basis. While SEBI has mandated minimum 80 per cent of investments to be made in the projects that are already operational and generating revenue, for PGInvIT all of its assets are operational which poses less risk.
These assets earn revenue based on the fixed tariffs on their long-term transmission service agreements (TSA) of around 35 years (residual tenure being around 29 years) provided normative availability of 98 per cent. Only one SPV Vizag Transmission Ltd, which contributes 20 per cent to the revenue, has certain escalable component on account of which revenue may vary. On account of the availability-based tariff, the assets’ revenue remains immune to the fluctuations in volumes transmitted and volatility in power demand, ensuring revenue visibility and steady cash flows. Hence, being a transmission-based InvIT, PGInvIT comes with a better risk-reward profile as compared to other InvITs like in the roads space, whose revenues are based on collection from toll and have to depend upon traffic.
Except one, all other SPVs are inter-state power transmission projects and hence operate under the point of collection (PoC) mechanism. Under PoC mechanism, transmission charges received from different customers are aggregated into a pool and then disbursed to the transmission service providers, which ultimately reduces the counterparty risk. Though POWERGRID KalaAmb Transmission Ltd (PKATL), which contributes around 5 per cent to the revenue, receives its revenue directly from Himachal Pradesh State Electricity Board, the collection efficiency has been healthy so far.
Performance and distributions
The assets under the InvIT have been maintaining availability levels more than the normative technical availability of 98 per cent for over the last three years. During FY23, the assets have registered an overall availability in excess of 99.75 per cent which has not only ensured the full recovery of transmission charge but has also led to incentive income.
The revenues remained stable at around ₹1,285.78 crore during FY23 as against ₹1,217.3 crore in FY22. While as per the norms, InvITs can have a net debt AUM (assets under management) upto 70 per cent, that of PGInvIT is merely 1 per cent (as against IndiGrid of around 59.5 per cent). This provides significant room for debt-funded acquisitions as and when the opportunities are spotted.
Further, PGInvIT has generated NDCFs of around ₹1,102.68 crore during FY23 against ₹962.94 crore (MayMay 2021 – March 2022) Of NDCF, around 99 per cent i.e. ₹1,092 crore has been used for distributions which is far higher than the distribution generally made by its peer IndiGrid i.e. 90 per cent. Hence this comes to distribution per unit (DPU) of around ₹12 in FY23 against DPU of 10.5 in FY22 (MayMay 2021 - March 2022). This, in turn, translates into pre-tax yield of around 10.4 per cent which is similar to IndiGrid’s yield of 9.7 per cent at FY23 DPU. DPU of ₹12 comprises ₹7.86 of interest, ₹2.88 of dividend (₹1.07 is exempt), ₹1.22 of debt repayment and ₹0.04 of treasury income (other income such as interest earned on fixed deposits). Hence about ₹10.89 out of ₹12 shall be taxable at investors’ respective tax slabs.
The management guides maintaining the DPU at ₹12 level during FY24 too.
Apart from the assets acquired during listing, PGInvIT has not made any acquisition as a result of which the debt is at low levels. However, as per the management, the transmission sector poses significant opportunities as about ₹31,000 crore of projects are under the bidding stage and further an addition of more than 50,000 circuit km is expected by 2030. Hence, the management believes as and when these projects get operational, there might be certain acquisitions over the next two years. As there is a significant headroom available for debt-funded acquisitions, PGInvIT won’t have to go for the other routes of capital raising such as rights issue, thereby leaving no scope of dilution.
With the acquisitions coming without dilution of shareholding, DPU can be maintained at the current level or might even increase. However, investors need to note that if the acquisitions don’t happen, it will be difficult for the InvIT to maintain the current level of distribution as, presently, the distribution has been maintained by dipping into the cash reserve.
PGInvIT shall be acquiring the balance 26 per cent in four SPVs currently held by the sponsor (PGCIL) in the coming quarters. The acquisition of the stake might bring certain incremental distribution for investors in the form of dividend which, however, will not be substantial, as per the management.