Stock Fundamentals

Should you subscribe to the POWERGRID InvIT IPO?

Maulik Madhu BL Research Bureau | Updated on April 30, 2021

This will be the second publicly listed InvIT in the power transmission sector after India Grid Trust

POWERGRID Infrastructure Investment Trust, set up in September 2020 by Power Grid Corporation of India (PowerGrid), has come out with an IPO to raise up to ₹7,735 crore. This will be the second publicly listed InvIT in the power transmission sector after India Grid Trust.

The offer will be open from April 29 to May 3, 2021. It will comprise a fresh issue of up to ₹4,993 crore and an offer for sale by PowerGrid of up to ₹2,742 crore. With the offer constituting around 85 per cent of the post issue equity capital, the market cap of the InvIT comes to around ₹9,100 crore.

The price band has been set at ₹99-100 per unit and applications will be accepted in multiples of 1,100 units. In case of oversubscription, units will be allotted on a proportionate basis. Not less than 25 per cent of the issue has been reserved for retail investors.

The proceeds from the fresh issue will be used largely for repayment or pre-payment of the debt of the InvIT’s power transmission project SPVs.

Investors with a moderate risk appetite can consider subscribing to the IPO, given the attractive pre-tax distribution yield of 11.4-12.6 per cent, and the relatively stable and predictable business model with revenue and cash flow visibility. The transfer of only operational projects to the InvIT is also a risk mitigating factor.

Power Grid InvIT mops up ₹ 3,480 crore from 47 anchor investors

While the yield is attractive in the current low interest regime, investors need to note that apart from the regular payouts, unitholders also stand to benefit (or lose) from any possible capital gain (or capital loss) from changes in value of units listed in the exchanges like for stocks . However, given the positives in favour of the POWERGRID InvIT, the risk-reward appears favourable.

About the InvIT

Sponsored by the state-owned PowerGrid, the country’s dominant power transmission company, the POWERGRID InvIT has been set up to own, construct, operate and maintain power transmission assets in India. PowerGrid owns and operates over 85 per cent of the country’s inter-regional power transmission infrastructure. The Government of India holds 51.34 per cent stake in the company.

The InvIT proposes to acquire five operational projects spread across five States comprising a network of 3,699 circuit kms of power transmission lines and substations with 6,630 MVA of transformation capacity from PowerGrid, the sponsor of the InvIT. These five assets have a gross enterprise value of ₹10,384 crore.

Power Grid fixes price band for its ₹7,735 crore InvIT IPO at ₹99-100

These projects were awarded to PowerGrid under the tariff-based competitive bidding (TBCB) mechanism. To start with, PowerGrid will transfer 74 per cent of its equity stake in each of these projects to the InvIT. The key consideration for projects to be transferred (even in future) is the expiry of the equity-lock in period. A project developer (PowerGrid in this case) can transfer 74 per cent of its stake to another entity (such as the InvIT) only after two years of commercial operation of that project.

Currently, PowerGrid has no plans to transfer its regulated return projects to the InvIT.

Risk mitigators

PowerGrid’s TBCB projects generate revenue by way of power transmission charges fixed under long-term agreements for 35 years from the date of commissioning. Also, the projects receive these charges provided the transmission infrastructure is available for transmitting electricity 98 per cent of the time on average. This is irrespective of the actual quantum of power transmitted. This provides long-term revenue visibility for the projects. The five transmission assets to be transferred initially to the POWERGRID InvIT have consistently met the 98 per cent criterion since their commissioning.

As these are inter-State power transmission projects, they operate under the point of connection (PoC) mechanism. Under this mechanism, transmission charges received from different customers are aggregated at the pan-India level into a pool and then disbursed to the transmission service providers. This helps diversify the risk associated with exposure to any specific customer. The operational revenue (power transmission income) from the five projects multiplied 3.8 times to ₹1,324 crore between FY18 and FY20. During this period, as each of these projects became fully operational, revenue grew. For the nine-month period ended December 2020, these projects generated revenue of ₹992 crore.

Also, while power transmission assets are exposed to the risk of delayed payments from the financially weak state power distribution utilities (Discoms), there are checks to minimise this risk. Late payments attract a surcharge of 1.50 per cent a month on the unpaid amount. That apart, the power transmission company can also regulate the supply of power to non-paying customers.

Other positives

PowerGrid will transfer to the InvIT only those transmission projects that have been in commercial operation for at least two years, a risk mitigator for investors. Furthermore, unlike many other infrastructure assets, once a power transmission project becomes operational, it has low operation and maintenance costs thereafter.

There is also a healthy pipeline of projects that PowerGrid can potentially consider for transfer to the InvIt in future. Today, the company has ₹5,000 crore worth of operational and ₹12,000 crore worth of under-construction TBCB power transmission projects.

The need for a robust transmission infrastructure for the country to support additions in power generation capacity particularly driven by renewable energy, and rural electrification is expected to translate into an investment of ₹3.35 trillion in the power transmission sector during 2021-2025. This should provide ample opportunity for growth.

Investor returns

According to PowerGrid, the average annual net cash distributable cash flow is expected to be ₹1,150 crore over the next three years. As per SEBI regulations, an InvIT must distribute at least 90 per cent of the net distributable cashflows to unitholders once every six months. Depending on the actual payout ranging from 90 to 100 per cent of the net distributable cash flows, the pre-tax annual yield could be roughly 11.4 to 12.6 per cent.

At the current market price of ₹126, the India Grid Trust, another power transmission focused InvIT, offers a pre-tax yield of 9.84 per cent. This assumes an annual distribution of ₹12.4 per unit as indicated by India Grid Trust. Global investment firm KKR and private power transmission company, Sterlite Power Transmission, are the InvIT sponsors of India Grid.

IPO rating

PowerGrid InvIT

 

 

 

Business

3

Financials

3

Management

4

Valuation

4

Overall

3.5

 

 

Ratings 1 to 5, 1 denoting lowest and 5 highest

 

Offer period

April 29 - May 3, 2021

Price band

₹99-100

Published on April 29, 2021

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