India Grid Trust (IndiGrid), the country’s first listed power sector infrastructure investment trust (InvIT), which was set up in 2016, is coming out with a rights issue.

IndiGrid proposes to raise up to ₹1,284 crore via its rights issue that will be open from April 6 to April 13, 2021. Existing unitholders can subscribe to the issue at a price of ₹110 per unit in the ratio of one for five. IndiGrid units are trading at ₹136.25 per unit currently (BSE).

The issue proceeds will be used for acquisition of 26 per cent equity capital of NER Transmission, an inter-state power transmission project, and part repayment of the outstanding external debt. Post the issue, the consolidated debt-to-equity ratio is expected to go down from 0.65 times to 0.58 times.

Given the positives relating to IndiGrid, existing unitholders can consider subscribing to the rights issue.

About IndiGrid

Sponsored by the global investment firm KKR and private power transmission company Sterlite Power Transmission, IndiGrid was set up to own and operate power transmission and renewable energy assets in India. As of March-end 2020, IndiGrid had assets under management of ₹20,000 crore and owned 13 operational power transmission projects comprising 7,570 circuit km (ckm) of transmission lines and 13,350 megavolt amperes (MVA) of transformation capacity across fifteen States and one UT.

The positives

Revenue from almost all the power transmission projects owned by IndiGrid depends on the transmission systems being available for transmitting electricity, 98 per cent of the time on average. It does not depend on the actual quantum of electricity transmitted. As long as the transmission projects maintain availability of at least 98 per cent, as IndiGrid’s power transmission assets have managed to do so, they receive the complete transmission charge.

Nearly all of IndiGrid’s power transmission projects operate under the point of connection (PoC) mechanism for inter-state transmission projects that offers revenue and cash flow visibility. Under this mechanism, payment for transmission services used by power distribution utilities is collected by Power Grid Corporation of India in a central pool and then paid to the transmission companies. The pan-India aggregation of transmission revenue from different customers and its distribution from the pool, helps diversify the risk associated with exposure to any specific customer, for transmission service providers.

That apart, the lack of an alternate power transmission infrastructure (beneficiaries have no choice but to use the infrastructure available in a particular region) too works in favour of transmission service providers.

Low operation and maintenance costs once a power transmission project has been commissioned, is another positive.

The government’s focus on strengthening the country’s power transmission infrastructure should also provide ample growth opportunity for players in the Indian power transmission sector. The need for a robust transmission infrastructure 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.

Growing steadily

IndiGrid has been acquiring power transmission assets at a healthy pace over the past few years, the impact of which is also reflected in the revenue growth. From ₹5,200 crore as on March 31, 2018, IndiGrid’s assets under management have grown to ₹20,000 crore today. From owning five power transmission projects comprising 3,361ckm of transmission lines and 6,000 MVA of transformation capacity to start with, this has gone up to 13 operational power transmission projects comprising 7,570 ckm of transmission lines and 13,350 MVA of transformation capacity, during the same period.

IndiGrid’s revenue (power transmission income) multiplied nearly 2.8 times from ₹448 crore to ₹1,243 crore between March 2018 and 2020. For the nine-month period ended December 2020, revenue grew 29 per cent year-on-year to ₹1,176 crore.

In tandem, the distribution to unitholders (as per the cash flow statement) too has risen steadily. The distribution proceeds went up from ₹185 crore in FY18 to ₹340 crore in FY19 and then to ₹610 crore in FY20. These totalled ₹525 crore for the nine-month period ended December 2020, up from ₹435 crore in the year-ago period.

Investor returns

In line with SEBI’s invIT regulations, an invIT must distribute at least 90 per cent of the net distributable cashflows to unitholders once every six months. IndiGrid has been distributing ₹3 per unit every quarter since May 2018 (₹3.1 per unit in January 2021). Given the acquisitions over the last few quarters which should add to the revenue and cash flows, IndiGrid plans to distribute ₹3.1 per unit, quarterly, henceforth. At the current market price of ₹136.25 per unit, the pre-tax annual distribution yield for FY21 comes to 8.8 per cent. Apart from this, unitholders also stand to benefit (or lose) from any possible capital gain (or capital loss) on sale of units in future. Given the positives, the risk-reward appears favourable.