Company Name – IndiGrid InvIT Fund Limited (IndiGrid) Current Share Price – INR 149 (April 6, 2022) Market Cap – INR 10,422 cr |
1. What is interesting about the stock?
Many individuals from Generation X and Baby Boomers have a large part of their investments in fixed income. Given the stage of life that they are in, capital preservation is a key consideration for such individuals. Consequently, FD, FMP, and Debt Mutual Funds have historically been the go-to options. However, over the last 5 years, InvITs have emerged as an interesting option for fixed income. India Grid Trust (IndiGrid) is India's largest Infrastructure Investment Trust (InvIT) in the power transmission sector. The trust owns, operates, and manages power transmission networks and renewable energy assets across India. It was established in 2016 by Sterlite Power Transmission Limited and is registered under SEBI’s InvIT regulations.
As a retail investor, we should think of return in an InvIT (like a REIT) as:
Return = Dividend + Price Appreciation/(Depreciation)
Dividend and price appreciation depend on:
Asset quality and revenue
Increase in asset base which is accretive (attractive price level)
Optimal level of leverage to increase equity returns
Interest rate environment (drives the discount rate)
IndiGrid is backed by leading private equity fund KKR (24%) and Singaporean sovereign wealth fund GIC (20%). The InvIT is a yield platform that offers investors an attractive yield income, backed by AAA-rated cash flows from the transmission and solar assets. IndiGrid has a strong relationship with its original sponsor, Sterlite Power. The latter has significant experience in bidding, designing, financing, constructing, and maintaining power transmission projects across India. The trust owns 14 operational projects constituting 40 power transmission lines of ~7,570 ckm and 11 sub-stations with 13,550 MVA transformation capacity. Another project in Maharashtra with 1 power transmission line of 15 ckm and 1 sub-station of 1,000 MVA is expected to be operational by July 2023. The trust also owns 100 MW of solar assets and has a presence in 18 states and 1 Union Territory.
Key competitive advantages of the InvIT are:
Underlying assets are power transmission projects which are less risky due to the predictability of cash flows. Inter-state power transmission projects enjoy the benefit of point of connection (PoC) payment and availability-based tariffs.
Availability-based tariffs: Payment for the projects is not dependent on the quantum of electricity transmitted and is instead based on the duration for which they are available for transmitting electricity. If the transmission projects maintain the availability of at least 98 percent, they receive the complete transmission charge. Availability of IndiGrid’s projects has been in the 98.79% - 99.89% range.
Point of Connection (PoC): Power distribution utilities make payment for transmission services into a central pool and it is subsequently distributed to the power transmission companies. Such aggregation of transmission revenue from different customers from across India mitigates the payment risk associated with exposure to a specific customer.
The trust has been able to steadily keep acquiring assets to grow its revenue. In September 2017, it had 2 power transmission assets. The portfolio has now grown to 14 assets.
Proven record of distributing the net distributable surplus to unitholders.
Marquee shareholders – KKR and GIC
2. Key Historical Financials
Continuous addition of assets has led to growth in revenues by 53% CAGR between FY18 and Dec '21. EBITDA during the same period has grown by 52% CAGR
IndiGrid has enhanced leverage on the books to fund some of the growth. As a result, interest expense has grown from INR 687 Cr in FY21 to INR 802 Cr in 9M FY22. This has led to a y-o-y decline in PAT
3. What is my view on company valuation?
InvIT’s return is determined by the DPU yield (distribution per unit/unit price or dividend) and price appreciation. An 8.5% yield (current yield) is attractive for investors seeking steady income as fixed deposit rates are 2-3% lower. Also, the average residual contract life for the projects is ~30 years and hence there is no foreseeable risk for tapering down of revenues. However, the trust has only one project in the pipeline, and the scope for capital appreciation could be limited unless new projects are acquired or developed which are value accretive. Interest rate hikes by RBI could also result in a fall in unit price to effectuate a 2-3% premium over FD rates and could lead to lower unit prices or higher dividends.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Inability to acquire value-accretive projects could stall the growth
Interest rate hardening to counter inflation could result in a fall in unit prices due to a decline in the yield alpha
About the Author
I have nearly 15 years of experience in investment banking and wealth management. I am an engineer by background and MBA from a premier institute in India.
Disclosure
I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.
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