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Infrastructure investment trusts or InvITs offer investors an opportunity to receive a regular inflow of income along with the possibility of capital appreciation (or depreciation) in the value of the InvIT units held.
Those with a long-term investment horizon and a moderate risk appetite can consider accumulating the units of India Grid Trust (IndiGrid), the country’s first listed power sector InvIT.
We had recommended IndiGrid’s existing unitholders to subscribe to the InvIT’s rights issue in April 2021 at ₹110 per unit, a 19 per cent discount to the then market price. Today, IndiGrid trades at ₹151 per unit. While the InvIT offers an attractive yield of 8.4 per cent, investors can play it safe by accumulating the InvIT units once the broader market corrects from the current levels.
With SEBI reducing the trading lot size for InvITs to 1 unit from August 2021, investing in InvITs has become more affordable for retail investors.
Why invest
IndiGrid’s exposure to the relatively less risky power transmission projects and its steady acquisition of such assets over the last few years and the resultant growth in revenue, along with its debt being under the SEBI-mandated cap, are some of the key positives in its favour. IndiGrid also has an established record of distributing the net distributable surplus (NDS) to its unitholders every quarter. As per SEBI Regulations, all publicly offered InvITs must distribute at least 90 per cent of the NDS generated to the unitholders once every six months.
IndiGrid has guided for an NDS per unit of ₹12.75 for FY22, half of which had been paid by the first half of the year. At the current market price of ₹151, the pre-tax annual yield comes to an attractive 8.4 per cent. Unitholders also stand to benefit from any possible capital gain on sale of units in future. The market price of the units is up 54 per cent since listing in June 2017. Although unit prices can move either way like stocks, given the business positives and the planned investments into the country’s power transmission sector, the risk-reward appears favourable for IndiGrid.
Its peer, the PowerGrid InvIT which got listed in May 2021, has announced an NDS of ₹4.5 per unit so far. In the absence of a track record, one cannot say what the total NDS for FY22 will be.
Steady business
Originally sponsored by the global investment firm KKR and private power transmission company Sterlite Power Transmission, IndiGrid was set up in October 2016 (listed in June 2017) to own and operate power transmission and renewable energy assets in India. Starting with two power transmission assets in September 2017, as IndiGrid acquired more assets, its portfolio grew to 14 projects by September 2021. This saw the InvIT’s AUM (assets under management) expand from ₹3,740 crore in September 2017 to ₹21,400 crore by September 2021. As of September-end 2021, IndiGrid owned a portfolio of 13 operational power transmission assets (all inter-state, except one which is intra-state) and 100 MW of an operational solar generation asset. As per SEBI regulations, an InvIT must invest at least 80 per cent of its assets in completed and income generating projects.
The availability-based tariffs and point of connection (PoC) payment mechanism for inter-state power transmission projects ensure cash flow and revenue stability for IndiGrid. The projects receive tariffs as long as they are available for transmitting electricity, 98 per cent of the time on average and are not dependent on the actual quantum of electricity transmitted. Provided the transmission projects maintain availability of at least 98 per cent, which IndiGrid’s power transmission assets have done so far, they receive the complete transmission charge.
Under the PoC mechanism, payment for transmission services used by power distribution utilities is made into a central pool and then distributed to the power transmission companies. The pan-India aggregation of transmission revenue from different customers and its proportionate distribution across all transmission service providers, helps minimize the payment risk associated with exposure to any specific customer. While the collection efficiency dropped in the post-pandemic period, it improved later. More importantly, since power transmission is an essential service, IndiGrid’s operations remained unaffected by the pandemic.
While revenue from the solar asset (unlike from power transmission projects) depends on the quantum of power generated, its impact is limited by its 3 per cent share in IndiGrid’s overall AUM.
Strong financials, regular income
Driven by a steady acquisition of operational power transmission assets, IndiGrid grew its revenue 55 per cent to ₹1,675 crore and EBITDA (earnings before interest, taxes, and depreciation) 52 per cent to ₹1,447 crore between FY18 and FY21 (all CAGR). This helped IndiGrid grow its net distributable cash flows (NDCF) 43 per cent to ₹808 crore during this period.
For the half-year ended September 2021, IndiGrid reported 91 per cent rise in revenue to ₹1,102 crore and 88 per cent rise in EBITDA to ₹1,008 crore and 18 per cent increase in the NDCF to ₹447 crore, compared to the same period a year ago. IndiGrid has been distributing at least ₹3 per unit every quarter since Q4 of FY18. The distribution per unit guidance has been revised to a quarterly ₹3.19 per unit for FY22.
IndiGrid’s net debt to AUM stands at 57 per cent, well below the SEBI mandated cap of 70 per cent for InvITs. IndiGrid has around ₹2,400 crore of borrowings coming due in FY23 which could possibly impact the NDCF for the year. According to the management, though, it is in discussions with lenders to refinance these borrowings.
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