PowerGrid Infrastructure Investment Trust, the first InvIT by the giant public sector enterprise, has opened its initial public offering (IPO) for bidding on April 29.
A majority of brokerages have largely advised subscribing to the public issue, citing strong lineage and support from the sponsor, vigorous financial positioning, consistent and stable cash flow, strategic and critical nature of power transmission business, and a skilled and experienced investment manager.
The yield from the cash flow is expected to be in the range of 7-12 percent, according to the brokerages.
State-owned Power Grid Corporation of India (PGCIL), the country's largest power transmission company is the sponsor, while PowerGrid Unchahar Transmission, its wholly-owned subsidiary, is the investment manager for the InvIT.
Since PGCIL is the main sponsor for this issue, it is required to hold a 15 percent share in the PowerGrid InvIT, while the rest will be held by public unit holders. The sponsor holds 100 percent shareholding in the investment manager.
The Power Grid Corporation, a Maharatna, is the third largest central public sector enterprise (CPSE) in terms of Gross Block and largest in terms of transmission lines length (CKMS) with over 85 percent market share in India’s cumulative inter-regional power transfer capacity.
PowerGrid InvIT plans to raise Rs 7,735 crore through the public issue, which comprises a fresh issue of Rs 4,993.48 crore and an offer for sale of up to Rs 2,741.51 crore by the selling unit holders.
The InvIT already garnered Rs 3,480 crore from anchor investors on April 28.
The company will utilise fresh issue proceeds for providing loans to the Initial Portfolio Assets for repayment/prepayment, of borrowings, and general corporate purposes.
The price band for the offer has been fixed at Rs 99-100 per unit, while an investor can bid for a minimum of 1,100 units and in multiple of 1,100 units thereafter.
"We recommend subscribing to the IPO, given the competitive advantage of its sponsors, consistent and stable cash flow, strategic and critical nature of power transmission business, and strong financial positioning," said Prabhudas Lilladher.
PowerGrid InvIT registered a revenue growth at a 96.3 percent Compound Annual Growth Rate (CAGR), 95.8 percent earnings before interest, taxes, depreciation and amortization (EBITDA) and adjusted profit growth at a CAGR of 82.2 percent during FY18-FY20 on back of commissioning new assets.
At the upper end of the price band, Prabhudas Lilladher expects PowerGrid InvIT to generate an internal rate of return (which estimates the likely profitability from potential investments) of around nine percent, over the life of assets.
Marwadi Shares and Finance, too, recommended subscription of this IPO as the sponsor is a mega player with many ongoing projects along with strong financial performance and stable cash flows.
Also read our in-house research team's take on the PowerGrid InvIT IPO
As per management projections, PowerGrid InvIT is likely to generate cash flow from operations at an average of Rs 1,170 crore over the next three years, which implies a 10 percent cash flow yield, said the brokerage.
PowerGrid InvIT, established in September 2020, owns interstate power transmission assets in India. After its listing on the bourses, of the total 23 inter-state power transmission projects owned by PGCIL, PowerGrid InvIT will initially acquire five projects (Initial Portfolio Assets) with a total network of 11 transmission lines, including six 765 kV transmission lines and five 400 kV transmission lines. It will have a total circuit length of approximately 3,698.6 km.
According to Dolat Capital, each of the Initial Portfolio Assets has been completed and is revenue-generating for more than a year. The assets have an average TSA (transmission service agreement) of 35 years, which is extendable till 50 years upon approvals, with a healthy residual value and stable cash flows.
According to the InvIT structure, 90 percent of the net cash is available for distribution to unit holders at least once in a quarter. The InvIT currently owns 74 percent of stake in each of the five TBCB (tariff-based competitive bidding) assets; it aims to acquire the remaining 26 percent after the lock-in period till 2024 through debt.
Each of the Initial Portfolio Assets is located in strategically important areas for electricity transmission connectivity. They deliver power from generating centres to load centres for meeting inter-regional power deficits.
Developing alternate lines may be challenging due to the terrain and in obtaining rights of evacuation, limited corridors and high construction costs. However, the sponsor is at an advantage as it can capitalise this opportunity to increase capacity by upgrading existing corridors.
With Initial Portfolio Assets characterized with perpetual ownership, higher visibility on cash flows, minimal counter party risk and lower operating risk, Choice Broking feels that the trust is well placed to benefit from structural growth in the power transmission space.
Said the brokerage: "PowerGrid InvIT asset SPVs (special purpose vehicles) normally pay 6-7 per cent as interest charge on the borrowed funds. So, with no disclosure of the yield income from the trust, it will be fair to assume that PGInvIT will have a pre-tax yield of over 7 per cent, which is better than the prevailing fixed deposit rates offered by the banks. Thus considering the above observations, we assign a 'subscribe for long term' rating for the issue."
Dolat Capital also believes PowerGrid InvIT is a good option for yield investors who can expect 11-12 per cent yield arising from stable cash flows. "The valuations indicate a (price to book ratio) P/B of 3.5x, as compared to sponsor-PGCIL’s P/B of 1.6x. However, the InVIT has superior over 20 percent return on equities (ROEs) compared to the average ROE of 15 percent for PGCIL," it said, adding that it recommended investors looking for yield, to subscribe to the IPO.
From Power Grid Corporation (which has a buy rating) perspective, the higher P/B of the PowerGrid InVIT which translates into a higher book, would mean an addition of around Rs 7 to its fair value, the brokerage added.
The management is confident about fulfilling the 98 per cent PAF (plant availability factor) requirement in order to recover fixed cost fully, with an additional incentive kicking in post 99.75 percent levels.
"The payout would be paid in a predetermined structure of 50 percent interest, 30 percent dividend and 20 percent principle payments," said Dolat Capital.
InvIT will see smooth collections as a surcharge of 1.5 percent per month on unpaid amount, and curtailment of power supply in case of non-payment will be charged to state power utilities.
Prabhudas Lilladher said that PowerGrid InvIT’s credit ratings are impressive: provisional [ICRA] AAA (Stable), CARE AAA (Is) and Stable and Provisional CCR AAA/Stable by ICRA, CARE and CRISIL respectively. "Its consolidated borrowings will be below 49 per cent of the total value of assets, post utilization of IPO proceeds. Low debt position on the balance sheet will provide the ability to finance growth for this business without substantial dilution in the near future," the brokerage said.
Revenues are derived from contracted tariffs under long-term contracts (up to 35 years) with low operating and maintenance costs. Payment securities in form of revolving letter of credit, surcharge of 1.25 per cent for late payments and lack of alternate power infrastructure deters beneficiaries from defaulting.
"This mechanism diversifies counterparty risks, ensures a stable cash flow independent of asset utilization and provides payment security," said the brokerage.
The key risks, according to Prabhudas Lilladher, could be a) newly settled trust with no operating history, b) possible inability to operate and maintain its power transmission projects to achieve prescribed availability, c) difficult to offset likely increase in operation and maintenance cost and d) delay in payments may affect business prospects in the long run.
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