Buy India Grid Trust; target of Rs 108: Edelweiss

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Edelweiss' research report on India Grid Trust

We initiate coverage on India Grid Trust (IndiGrid) with ‘BUY’ and target price of INR108 on account of: a) it being an excellent play on infrastructure assets (transmission) with long-term perpetual yield along with earnings growth option; b) certainty of high cash flows as IndiGrid earns revenue from contracted tariffs under long-term contracts, eschewing volume risks; and c) ROFO assets boost visibility with 3.5x EBITDA potential and 4x growth in net distributable cash flow, which ensure 3.8% DPU growth over FY18-22E. At CMP, the stock is attractively priced at ~13% yield on FY19E earnings. Interest rate risks, construction delay in ROFO assets and poor liquidity in instrument are key risks.

Outlook
We like IndiGrid’s business model, which entails no volume and tariff revision risks, unlike PGCIL, but fetches similar ~15% return (yield + DPU growth) p.a. We anticipate drop down of all ROFO assets to improve ~400bps to 12.1% over the next four years, led by higher project IRRs and leverage benefits. We initiate coverage with ‘BUY’ and target price of INR108 (15% upside) on FY20E, discounting cash flows at 11% COE.
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