We continue to be optimistic about the potential of transmission sector: IndiGrid

IndiGrid is the first listed Infrastructure Investment Trust (InvIT) in the Indian power sector. It owns 13 operating projects, consisting of 38 transmission lines, with more than 7,570 km and 13,350 MVA in 17 Indian states and 1 Union Territory. Sterlite Power, KKR and GIC are marquee investors in IndiGrid.

Shah says the company believes that transmission will continue to form a major chunk of the portfolio, with solar contributing 10-15 percent in a gradual manner.

How will IndiGrid utilise the proceeds from the rights issue?

It will help us grow further. With the support of our marquee investors, we are confident of making IndiGrid one of the most admired funds.

IndiGrid has grown from a Rs 6,000 crore trust to a Rs 20,000 crore one in two years. We have also grown our DPU (distribution per unit) per year from Rs 9.80 to Rs 12.40 since listing in 2017, delivering superior returns for our unit holders.

What are the plans for the next 3 years?

We see an immense growth opportunity for IndiGrid -- both in the near term as well as the long term. We remain committed to the four key tenets of our growth strategy -- a focussed business model, value accretion, predictable distribution and optimal capital structure.

We have been focussing on a more robust, independent and future-ready asset management framework through our digital tie-up with IBM, etc. Additionally, with our acquisition pipeline, systematic diversification into renewables and KKR’s investment expertise as a sponsor, we have a strong visibility of an asset portfolio of about Rs 200 billion over the next 6-8 months.

This is more than five-fold our AUM size at the time of listing. We expect to further ramp up the AUM to Rs 30,000 crore over the next 24 months, given the attractive pipeline -- both in the transmission and renewable sectors. While we have been extremely mindful of ensuring predictable and sustainable distribution, we have managed to deliver not only a steady distribution over the last 15 quarters, but we have also grown it consistently.

When IndiGrid listed in 2017, our DPU was about Rs 11 per unit. This increased to Rs 12 per unit in 2019. In the quarter gone by, we have again raised our DPU to Rs 12.40/unit and we are confident of maintaining this over a considerable period of time.

IndiGrid recently forayed into the solar energy space. Are you looking to add more solar acquisitions? What does your pipeline look like?

Yes, you are correct. As a part of our growth strategy, we are moving a step ahead by diversifying into renewables and exploring solar power assets. We recently signed a share purchase agreement with Fotowatio Renewable Ventures (FRV) for acquiring a 100 percent stake in two solar assets with a cumulative capacity of 100 MW.

While power transmission assets remain at the core of IndiGrid’s growth strategy, we believe such attractive opportunities to acquire good quality solar projects ties in well with our strategy of providing predictable cash flows to our investors and reinforces our commitment to be a socially responsible organisation.

The Indian solar generation sector is undergoing a phase of consolidation, with many attractive renewable assets available to fuel our inorganic growth. We continue to evaluate several such opportunities which goes well with our strategy to acquire good quality solar projects, with robust power purchase agreements, operational track record and financially strong central counterparties like NTPC and Solar Energy Corporation of India (SECI).

However, we continue to be optimistic about the potential of the transmission sector as well and believe that transmission will continue to form a major chunk of our portfolio, with solar contributing 10-15 percent in a gradual manner.

The FM has announced that the government will allow FPIs to debt finance InvITs and REITs. What are your thoughts on the move?

The announcement to allow Foreign Portfolio Investors (FPIs) to invest through debt securities of InvITs/REITs was first made in the FY19 budget. While the intent was stated, the execution was still awaited by the regulators. The scarcity of suitable long-term capital sources had been impeding the growth of InvITs/REITs (Real Estate Investment Trusts) and limiting their pace of growth.

In Budget 2021, the Finance Minister announced that debt financing of InvITs and REITs by FPIs will be allowed.  This has been a long-awaited task: to align SEBI’s FPI regulations with InvIT and REIT regulations. I am happy that this has been finally announced.

Amendments have also been proposed to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, which will iron out a lot of concerns of lenders.

This means that debt capital will now flow easily from FPIs, including focussed funds and financial institutions, into InvITs/REITs and help them reach their true potential. We are also hopeful that similar measures will be announced by the Insurance Regulatory and Development Authority of India (IRDAI) and the Pension Fund Regulatory and Development Authority (PFRDA) to open up new channels of capital flows into InvITs to support the next leg of growth.

Customs duty on some solar products was increased to encourage local production. Do you think we can meet the demand now?

While the hike in import duties might cause minor issues in the beginning, I am a strong believer in India’s manufacturing potential. Migration to the domestic industry will not only promote indigenous research and manufacturing but will also lead to job creation in the sector. This will especially bode well for MSMEs.

This is another step towards realising the goal of Aatmanirbhar Bharat and ensuring that India becomes self-sustainable. The budget also showed faith in the solar sector by an additional capital infusion of Rs 1,000 crore to SECI and Rs 1,500 crore to the Indian Renewable Energy Development Agency (IREDA). All these measures will help create infrastructure and a seamless supply chain to achieve the ambitious target of 175 GW of renewable energy capacity by 2022.

As of today, InvITs do not attract retail investors due to the large minimum lot size. Do you expect SEBI to reduce this further anytime soon?

The trifecta of steady cash flows, strong corporate governance, and superior risk-adjusted returns makes InvITs an attractive investment vehicle. InvITs are inherently more stable, less risky and less speculative as compared to equity securities and provide consistent cash flows to investors.

Reduction in lot size would afford retail investors to invest in a wider range of financial products and enable them to build a more balanced and diversified portfolio and allow level-playing field with other listed equities. To some extent, InvITs are actually a better alternative to savings/fixed deposits (FDs).

FDs have lock-ins and generate sub-inflation returns while InvITs can be freely traded on exchanges. The reduced lot size will be immensely helpful in improving liquidity and enable a market-led price discovery, which is imperative to attract large-scale participation.

The move will also enable InvITs to enter the benchmark indices that will allow passive tracking by index funds and diversify the investor base by mitigating major movements that typically define the trading patterns of thinly traded securities. In matured economies like the US, the UK, Hong Kong, Singapore, etc., there is no minimum lot size or trading restriction for InvITs.

What are your thoughts on the plans of several large companies getting into the InvIT space?
I am quite excited about the potential of InvITs in India. I truly believe that 2021 is going to be an inflection year for Indian InvITs, with the deepening of the market on account of fresh issuances by large players like Power Grid, NHAI, etc.

This will help streamline regulations and create further investor awareness and interest. While InvITs have taken off better than expected, there is still a significant market upside for Indian InvITs as they currently form just 0.7 percent of the Market Cap/GDP ratio as compared to 20 percent in Singapore and 7 percent in HK.

Since the first listing three years ago, the InvIT/ REIT market has grown quickly to seven InvITs and three REITs across infrastructure assets like roads, power transmission, commercial estate and gas pipelines, with a market capitalisation of over $18 billion. These InvITs and REITs, put together, garnered assets under management worth over Rs 2 lakh crore, with over Rs 40,000 crore equity raised from domestic and global investors like GIC, KKR, CPPIB, Brookfield, Blackstone, OMERs, Allianz, IFC, etc.

Global rating agency CRISIL believes that InvITs-REITs have an enormous potential of about Rs 8 lakh crore in India over the next 4-6 years.