India Grid Trust (IndiGrid InvIt) is entering the primary market on Wednesday 17th May 2017, to raise Rs. 2,250 crore via a fresh issue of units, in the price band of Rs. 98 to Rs. 100 per unit. Since minimum issue size is 10,205 units (i.e. Rs. 10 lakh at lower end) issue is not for retail investors (which have Rs. 2 lakh threshold for IPO of equity shares), as post listing lot size too is large at 5,103 units (i.e. Rs. 5 lakh at lower end) discouraging retail participation. Minimum 25% of the issue is reserved for non-institutional investors (read HNIs) and balance 75% for institutions. To be listed on NSE and BSE, issue closes on Friday, 19th May 2017 and is expected to list on and about 6th June 2017.
IndiGrid InvIT is a Special Purpose Vehicle (SPV) established in Oct 2016 to acquire 2 inter-state revenue-generating power transmission assets, Bhopal Dhule Transmission Company Ltd (BDTCL) and Jabalpur Transmission Company Ltd (JTCL), comprising 8 power transmission lines of 1,936 circuit kms and two substations of 6,000 MVA transformation capacity across 4 states, from its sponsor, Sterlite Power Grid Ventures Limited, a leading independent power transmission company with 29% market share in Tariff Based Competitive Bidding (TBCB) system, and owned 72% by Sterlite Power Transmission Ltd and 28% by Standard Chartered Private Equity.
The SPV also has the Right of First Offer (ROFO), valid for a period of 7 years from its listing, on its sponsor’s 8 of total 9 power assets, comprising 21 transmission lines of 4,831 circuit kms length and 5 substations of 6,630 MVA transformation capacity. While 3 of these projects which are fully-commissioned must comply with SEBI criteria of one-year minimum lifespan before they can qualify for acquisition by the SPV, other projects are at different stages of development. IndiGrid is expected to acquire these 8 assets over FY18-22 (financed by fresh debt), which can lead to gains in the form of capital growth, as cash flows improve. Since 90% of distributable cash must be given to unit holders, at least twice a year, as SEBI regulations, the prospects over longer term appear bright.
Its FY17 revenue was reported at Rs. 473 crore with EBITDA of Rs. 428 crore, which is expected to remain stable over FY18 and FY19. Interest outgo of Rs. 368 crore, lead to net loss of Rs. 301 crore for FY17, which should be back in the black in FY18, as about Rs. 1,600 crore of the total fresh issue proceeds of Rs. 2,250 will be used to repay external debt and unsecured loans from sponsor, reducing consolidated debt to Rs. 1,000 crore, post issue, from present level of Rs. 2,544 crore. At Rs. 100 per unit, enterprise value of the SPV is pegged close to Rs. 3,700 crore. Based on estimated FY18 cash flow of Rs. 417 crore, the yield (unguaranteed) on the product works out to ~11%, which may increase, post-acquisition of further projects.
The power assets under IndiGrid InvIT have tenure of upto 35 years, which can be increased upto 50 years with periodic maintenance. Besides long tenure, income stream is secured, as assured power offtake under their respective transmission service agreements (TSAs) ensure payment of stipulated tariff, subject to achievement of normative line availability of 98% annually (both projects have maintained availability of 99% and higher since operational). Thus, these power assets carry lower risk (and hence more stable) vis-à-vis toll generating road asset of previous invIT issue from IRB, which despite being a maiden offering, received overwhelming response of subscription of 8.6times, on issue size of ~Rs. 6,000 crore. Positive sentiment coupled with higher stability and longer asset tenure should weigh positively on the current issue, despite lower expected yield (10-12% for IRB InvIT).
InvIT is quasi-debt mixed with some equity risk. However holding period for computation of capital gain, at 3 years, is similar to debt instruments vis-a-vis listed equity qualifying for long term capital gain at 1 year. Since InvITs are structurally designed to suit institutional investors or ultra HNIs, looking to maximise gains from fixed return instruments, one can consider this issue with a long term horizon.
Disclosure: No Interest.