PowerGrid InvIT IPO analysis!

PowerGrid InvIT is set to raise up to Rs 7,735 crore via IPO which opened on Apr 29th, Thursday. Here are the details:

About PowerGrid InvIT

• The POWERGRID Infrastructure Investment Trust was formed on September 14, 2020 by the sponsor, Power Grid Corporation of India Ltd. 
• The PowerGrid InvIT was set up to own, construct, operate, maintain and invest in power transmission assets in India. Its sponsor, PowerGrid Corp. of India, is a central public sector enterprise under the Ministry of Power, and is listed on the BSE and NSE.
• The InvIT proposes to acquire five projects initially with a total network of 11 power transmission lines of approximately 3,698.5 circuit kilometres. A PowerGrid subsidiary will manage the InvIT, initial portfolio assets and take investment decisions relating to the assets.
• The InvIT intends to distribute at least 90% of the net cash available for distribution to unitholders once every quarter in every financial year.

Financials

• PowerGrid InvIT’s revenue from operations has increased from Rs 343 crore in FY18 to Rs 1,324 crore in FY20. In the same period, the profit has also risen more than three-fold to Rs 379 crore in FY20. 
• The company has improved its debt position. The Long-term D/E ratio has fallen from 10.41 in FY18 to 3.36 in 9MFY21.
• PGIIT have been given a credit rating of Provisional [ICRA] AAA (Stable), CARE AAA (Is); Stable and Provisional CCR AAA/Stable by ICRA Limited, CARE Ratings Limited and CRISIL Ratings Limited, respectively.
• As of December 31, 2020, PGIIT's debt-equity ratio was 3.36.
• PGInVIT’s revenue, EBITDA and Adj.PAT grew at a CAGR of 96.3%, 95.8% and 82.2% over FY18-20 on back of commissioning new assets.
• Revenues are derived out of contracted tariffs under long-term contracts (up to 35 years) with low operating and maintenance costs.

Expected yield and key risks

• The company management says the InvIT is likely to have distributable cash flow at an average of Rs 1,150 crore over the next three years. This implies a cash flow yield of around 11%.
• The issue is expected to have a pre-tax yield between 9-11%, arising from stable cash flows.
• However since this is a newly settled trust, there is no operating history. Power Grid InvIT may be unable to operate and maintain its power transmission projects to achieve prescribed availability. This could in turn hurt underlying distributable cash flows. Difficult to offset likely increase in O&M cost. 
• Delay in payments may affect business prospects in the long run.

About the issue

Issue open: - 29th April 2021

Price band: Rs 99- 100 per share

Issue Size: Rs 7,735 crore (Gross)

Issue Size: The InvIT IPO comprises a fresh issue of up to Rs 4,993.5 crore and existing investors offering units worth up to Rs 2,741.5 crore.

Reservation for QIB: 60% , Retail - 15%, Non institutional Investors -25%. 

Bid lot: 1,100 units, and in multiples thereof

INDmoney Recommendation

At the higher end of the price band, PowerGrid InvIT is available at a cash flow yield of 11%  and a 1% premium to its NAV value. Closest peer Sterlite Power-sponsored IndiGrid is trading at a 9% yield with a 9% premium to its NAV value. Hence, the issue seems to be reasonably valued.

Given the competitive advantage of Powergrid (sponsor), consistent and stable cash flows over the last three years, strategic business (power transmission), healthy debt ratios, stable margins and return ratios, we remain positive on the prospects of the issue.