By Vivek AnanthTo kickstart the centre’s agenda to tap the InvIT market to raise funds for its public sector undertakings, the Power Grid InvIT IPO hit the street on Thursday. Seeking to raise up to Rs 7,735 crore, out of which nearly up to Rs 2,742 crore is an offer for sale by the selling unitholder, essentiallyPower Grid as the sponsor of the initial portfolio of assets housed in five special purpose vehicles.
These assets are PowerGrid Vizag Transmission Ltd, PowerGrid Kala Amb Transmission Ltd, PowerGrid Parli Transmission Ltd, PowerGrid Warora Transmission Ltd and PowerGrid Jabalpur Transmission Ltd.
The company has already raised Rs 3,480 crore from anchor investors, and by the end of the second day of bidding, 61% of the units available for subscription. This means the InvIT has 78% of the funds already.
Although InvITs are a good option for investors looking for a stable yield from their investment (analyst estimates peg this at around 11.0-11.5%), the large ticket size for InvITs keep away a lot of investors. For example, for Power Grid InvIT’s IPO price band of Rs 99-100 means that for a minimum lot of 1,100 units and multiples thereof, an investor will have to shell out up to Rs 1,10,000 to even make a bid.
That apart, does Power Grid InvIT’s pedigree give it a leg up against other power transmission InvITs in the market?
Steady cash flows and higher yield
The other competitor in the power transmission assets space is India Grid Investment Trust. The company at current prices gives a yield of around 9.5-10.0%. This is lower than Power Grid InvIT’s expected yield.
But the problem is that there is no history of distribution available for Power Grid InvIT. Power Grid, as the sponsor, transferred five assets to the trust. The trust will use the money raised through the fresh issue of units to prepay or part pay loans taken by the five SPV companies that run 11 transmission lines, that are of critical nature for India’s power needs. These assets under management come up to Rs 7,200 crore.
The trust will lend this money through the fresh issue onward to the SPVs, which will use the funds to repay/prepay debt. The SPVs will pay the trust as interest on loan (50%), dividend (30%), loan repayment (20%).
This is what the trust’s assets earned in terms of revenues and cash flows over the past three financial years:
After the debt is paid off, the SPVs will have more funds, and as a result higher cash flows. InvITs have to distribute at least 90% of their net distributable cash flows to investors. This has to happen at least once in a quarter, but within six months of listing.
Backing of Power Grid makes the IPO compelling
The backing of Power Grid makes this particular InvIT a compelling bet for investors who are hungry for high yielding investment avenues. Although the attendant risks of non payment by customers remains for the power industry as whole, Power Grid InvIT’s assets run on a different model.
Based on the availability of the transmission assets for 98%, the SPVs are nearly guaranteed tariffs. There are other provisions like bank guarantees and late payment surcharges that have been built in to make sure dues are honoured.
These are the projections of the future revenues and cash flows for the five assets:
Although these projections are trending downward, the cash flows available for distribution look quite enticing for investors. The long (average of 32 years) contract life of the 11 transmission lines give predictability to the cash flows as well. The lower debt levels after repayment of debt by the underlying assets SPV will make sure there are adequate funds available in the future for acquisitions by the trust of more transmission assets.
And for Power Grid’s tariff-based competitive bidding projects, there is a ready vehicle available for future monetisation of assets for recycling capital by the transmission company.