This post has been written by Khubaib Abdullah for FinMedium Research Desk.
Table of Contents
1 – Company overview
2 – Product Portfolio
3 – CEO’s message
4 – Industry overview
5 – Industry growth
6 – The Covid-19 effect
7 – Recent Business Performance
8 – Emerging trends
9 – Opportunities
10 – Risks
11 – Focus charts
12 – Financial Analysis
13 – Ratio Analysis
14 – Company Data
15 – Road Ahead
“We all do better when we all do better”Paul Wellstone
There are no better words to describe India Grid Investment Trust, an SPV company, that is in the business of acquiring assets in a very segmented industry, operating, running and maintaining them; and lastly providing greatest possible benefits to the unitholders.
India Grid Investment Trust: Company Overview
An infrastructure investment trust (“InvIT”) established to own inter-state power transmission assets in India. India Grid Investment Trust was established on October 21, 2016, by its sponsor Sterlite Power Grid Ventures Limited and two other global investment groups KKR Group, (USA) and GIC Investments (Singapore).
Sterlite Power Grid Ventures Limited is one of the leading independent power transmission companies operating in the private sector.
The trust acquires and runs interstate electricity power plants. Of the 12 inter-state power transmission projects developed by the Sterlite (on of the Principal Sponsors), India Grid Investment Trust has acquired seven projects with a total network of eight power transmission lines of more than 4,900ckms and four substations having 7,735 MVA of transformation capacity across eleven states.
As part of acquiring third-party transmission assets, Patran Transmission Company Limited (“PTCL”) from Techno Electric & Engineering Company Ltd. (“TEECL”) on August 31, 2018, with one substation having 1,000 MVA of transmission capacity in Punjab has been acquired.
The carrying value of the power transmission assets as of March 31, 2020, is INR 1,08,163.16 million.
Each of these 8 Portfolio Assets have been completed and revenue-generating for more than a year. These Portfolio Assets were awarded (through its subsidiaries) under the ‘tariff-based competitive bidding’ mechanism (“TBCB”) on a ‘build-own-operate-maintain’ (“BOOM”) basis for India Grid Investment Trust.
India’s tremendous growth in renewable energy capacity puts the nation on a clear and achievable path towards its renewable energy target of 450 gigawatts by 2030. The total return, which includes the distribution made to date as well as the change in unit price, is 34%.
Product Portfolio of India Grid Investment Trust
India Grid Investment Trust owns and operates 11 electricity transmission lines and other such plants that transmit power across 12 states and 1 UT. All the 11 plants are shown in the image below. The company further intends to add 1 more plant to its portfolio in 2021.
Mr Shah, the India Grid Investment Trust’s CEO, has extensive experience in private equity financing, mergers and acquisitions, infrastructure financing, regulatory and macroeconomic policy issues with a focus on the infrastructure sector.
Before joining India Grid Investment Trust, he was the Chief Financial Officer of Sterlite Power. He also worked with Sterlite Power, Larsen & Toubro Limited, L&T Infrastructure Finance Company Limited and Procter & Gamble International Operations Pte. Limited.
On the nation Wide Lockdown’s effect on business:
“IndiGrid and especially its asset management teams have been up to the task during this period and have been instrumental in ensuring safe operations of the asset portfolio and the national grid without disruption.
During the lockdown period, not only have we focused on maintaining the highest levels of availability, but we have also focused on growing the underlying asset portfolio.”
On the Past Financial Year’s meteoric expansion:
“The financial year under review has been transformational for IndiGrid. We have almost doubled our market capitalisation over the last three years to approx INR 60 billion currently on the back of our successful follow-on equity raise worth INR 25 billion in May 2019.
This was raised through a preferential issue of units to qualified institutional investors, of which a majority portion has been subscribed by KKR, GIC and other marquee institutional investors.
As part of this transaction, Sterlite Investment Managers Limited or the investment manager of IndiGrid is now majorly owned by KKR.”
On expanding into other sectors:
“As a part of our growth strategy, we are moving a step ahead by diversifying into renewables and exploring solar power assets. This diversification will be substantially yield-accretive, and is
expected to provide predictable and growing distribution to the investors, besides having good synergies with our business model.”
On the returns for the unitholders:
“Our total return, which includes the distribution made to date as well as the change in unit price, is 34%. This is substantially higher than that of G-sec and other comparable indices such as NSE Infra, BSE Capital Goods, and NSE 500 when tracked since our listing date.
On Future Prospects of the Trust:
“As we look into the future from here on, we see immense opportunity for IndiGrid. To achieve a GDP of USD 5 trillion by FY 2024-25, India needs to spend about USD 1.4 trillion or INR 105
trillion over the next five years on infrastructure. Banks and non-banking financial institutions, already battling asset-liability mismatches and bad loans, cannot be solely relied upon for this investment.
Meanwhile, infrastructure developers need to monetize their operational assets efficiently and churn the capital to invest in the construction of new assets. IndiGrid, being the first power InvIT, is well-positioned to seize this massive potential opportunity.
Over the last three years, the underlying performance has been robust and with our equity fundraise, we remain well capitalized to grow faster than ever before.
With planned acquisitions ahead, we have strong visibility of an asset portfolio of INR 180 billion over the next two years, which is more than fivefold our AUM size at the time of listing.”
Power is among the most critical component of infrastructure, crucial for the economic growth and welfare of nations.
The existence and development of adequate infrastructure are essential for the sustained growth of the Indian economy.
In May 2018, India ranked fourth in the Asia Pacific region out of 25 nations on an index that measured their overall power.
India was ranked fourth in wind power, fifth in solar power, and fifth in renewable power installed capacity as of 2018. India ranked sixth in the list of countries to make significant investments in clean energy at US$ 90 billion.
The Indian power sector is undergoing a significant change that has redefined the industry outlook. Sustained economic growth continues to drive electricity demand in India.
The Government of India’s focus on attaining ‘Power for all’ has accelerated capacity addition in the country. At the same time, the competitive intensity is increasing at both the market and supply sides (fuel, logistics, finances, and manpower).
By 2022, solar energy is estimated to contribute 114 GW, followed by 67 GW from wind power and 15 GW from biomass and hydropower. The target for renewable energy has been increased to 227 GW by 2022.
The total installed capacity of power stations in India stood at 370.34 GW as of April 2020. Electricity production reached 1,252.61 billion units (BU) in FY20.
The Government of India has released its roadmap to achieve 227 GW capacity in renewable energy (including 114 GW of solar power and 67 GW of wind power) by 2022. The Union Government of India is preparing a ‘rent a roof’ policy for supporting its target of generating 40 gigawatts (GW) of power through solar rooftop projects by 2022.
Coal-based power-generation capacity in India, which currently stands at 199.5 GW, is expected to witness total installed capacity addition of 47.86 GW by 2022.
Recent Business Performance of India Grid Investment Trust
The trust’s revenues grew by 86% YoY and more than doubled its asset base over the year. The borrowing of the firm has swollen to by 140%. Capital has also been raised by selling the units to marquee investors such as the Fund of the Government of Singapore and Schroder Asian Asset Income Fund.
During the year, three acquisitions viz NRSS XXIX Transmission Ltd (NTL) and Odisha Generation Phase II Transmission Ltd (OGPTL) were acquired in H1 of the financial year, and completed the acquisition of Sterlite Power in H2 of the financial year, as we acquired the East North Interconnection Company Limited (ENICL)
This has managed to bring the total asset count in the portfolio of the firm to 10. Going ahead, the Trust plans to acquire more plants in the future.
Future Trends in the Industry
The past few years have passed with a lot of uncertainty for the power generation industry. While most players chose to stay on the sidelines, the India Grid Trust has been actively mopping up AAA-rated assets from all over the country. While it is difficult to know with certainty what the future brings with itself, there are certain possibilities more probable than others.
- The coal-generated electricity plants are expected to rise in number as the Coal block auction is opened to the private sector. This shall inevitably push the price of coal lower and thus benefiting these coal power plants. Add to this the higher coal production as well increase in the limit of capacity utilisation, the time to come shall treat the thermal power plants well. We may even witness a few vertically integrated players on the scene in the years to come.
- The rise in the electricity cost may witness a downfall. What seemed to be a transitory fad where factories chose to sign deals with alternate suppliers by signing corporate power purchase agreements (PPAs) now seems to be hitting the DISCOMS in their bottom line. The future may call theme to lower their prices to retain customers.
- The utilities are now helping smaller users aggregate so that private developers are attracted to set up local generation, either at an individual level (e.g., smaller solar rooftop) or the community level (e.g., mid-sized rural wind-solar hybrid projects). This may prove to be a cause of trouble for large interstate plants if this trend catches steam.
- Renewable energy planet may see their valuations lowered as the norms around them ease and ambitious targets are set to achieve sustainable energy levels.
- Most importantly, the stage for cross country transmission is set as well. India may as well start exporting electricity after water and furniture to the rapidly resign South Asian economies that dot the Indian borders.
- The race for renewable energy plants such as wind and solar gets more and more fierce. With already major players such as Adani, with their taste for larger than life projects, even Reliance Industries backed by India’s richest man Mukesh Ambani has also announced their plans to develop a fully integrated green energy power plants.
- Due to their high capital intensity, weather-dependent renewable energies (RES) such as solar and wind face considerable investment risks in power markets. Besides, their uncertain production volumes also affect the investment risks of other plant types through the impact on power prices and residual demand.
Financial Analysis of India Grid Investment Trust
- The amounts here are in millions.
- The revenues of the India Grid Investment Trust have shown strong rising trends with the increase being 48% in 2018-2019 and 86% in 2019-2020.
- The Operating Profit Margin of India Grid Investment Trust has been around 95%, which is quite understandable as the company is merely an SPV. However, what needs to be seen is how much of it turns into cash. The only key activity for these SPVs is the maintenance of the transmission assets which is again outsourced to third parties. There are no employees in these entities and no other significant processes are performed for earning tariff revenues.
- India Grid Investment Trust has been getting tax rebates right from its inception. This is mostly because the management expects most of the project to make a loss in their initial phases. Nearly 8 out of 10 projects are in their infancy phases, thus the company expects most of them to keep making losses (the projects, in reality, are making profits although insufficiently). These projected losses are carried forward when the tax payment date arrives and thus allows for tax rebates to the company.
- Thus India Grid Investment Trust does not just have very little expenses, it also does not have to pay a lot in taxes (at least for now) and also pays its unitholders every quarter. What is not to love here. Let us keep looking further.
- Other expenses have doubled over the year. The depreciation costs have also increased, but that is mostly because fo the new plants that are being added, the depreciation is bound to increase.
- Trade receivables have gone up by 115% while the payables have also gone up in tandem by 105%. It is so noteworthy that the receivables only of those parties that are considered good are reported. The real receivables number may be off, no one can say for sure. These receivables and payables are both cleared within 30-60 days.
- CFO And PAT Comparision of India Grid Investment Trust
- The amounts here are in cr.
- The CFO and the PAT must be in line with each other in the longer run. This is a simple yet effective trick to know of any financial chicanery beforehand. Companies can inflate their revenues or even change what they define as revenues as per their need. They may even hide a part of their revenues from the good days to show them during the band ones. The cash on the other hand is the ultimate truth, free from all such creative account malpractices. (we shall look at the free cash flow in a moment). Thus, in the longer run, these two numbers must be in tandem with each other. Even though they have very little company data, it may be safe to say that the India Grid Investment Trust PAT has kept up with the CFO.
- India Grid Investment Trust, very curiously says that it had no financial transactions and hence no Statements to show in the year 2017. This is rather weird for a company of such a scale, incorporated in 2016, and not indulge in any transaction for over two years.
- Fund Flow Analysis of India Grid Investment Trust
- Fund Flow analysis is a simple method to understand how the funds have been used by the company. It can pinpoint any misdeeds on the management’s side.
- DO keep in mind, any increase in assets means that the company has spent funds (outflow) to purchase them and vice versa. Similarly, any increase in liabilities implies an increase (inflow) of funds.
- The amounts here are in cr.
- We observe the following here:
- An increase in equity share capital.
- India Grid Investment Trust has raised capital by way of QIP of units. The holders of these units are liable to receive the 90% of the cash proceeds each quarter. Each unit also grants the right of one vote. The firm has an impressive array of FII inventors.
- Cash reserves have fallen and have rather turned into the negative.
- This is a serious concern, especially for a Trust whose job is to distribute the cash to the investors quarterly. While the cash reserves have no reason to be high (since the cash would have been distributed) there is absolutely no reason for the reserves to be in the negative. Negative reserves are most often seen in loss-making companies. We shall look at the cash further shortly.
- The borrowings have increased greatly, especially in the year 2019-2020.
- India Grid Investment Trust has borrowed heavily using non-convertible debentures and various term loans. This has been done to allow for the acquisition of third party power
- Free Cash Flow of India Grid Investment Trust
- Free cash flow is the “savings” of the company. Similar to how there is money left after the monthly needs are met, an individual is free to do whatever he wishes with it. On similar lines, this is the case that the company is free to do whatever it wants with it. Just like an individual, it may choose to save it or invest in other projects or simple splurge by declaring dividends.
- While it is pretty obvious what the company does with its surplus cash: it gives it to its unitholders. But what concerns me is the fact that India Grid Investment Trust has been paying more than what it makes in profit. It is, for this reason, it is imperative to conduct a free cash flow analysis. FCF for a company is simply its Cash Flow from Operations less the amount spent in Capex.
FCF = CFO – CAPEX
The fund flow analysis of India Grid Investment Trust has been attached herein.
- The amount here is in cr.
- The analysis paints a grim picture for India Grid Investment Trust. The firm is left with no cash at the end after meeting its CAPEX needs. This also explains why the firm needs to raise capital one way or the other. It has raised capital by selling equity and has also taken up massive debt. This is not a sign of a healthy company. Going by the very little data (it goes back only 3 years) India Grid Investment Trust has been taking on debt to pay its unitholders and in 2020 also had to rely on selling its equity share.
- This tracking down of cash leads to further revelations about the company. Sadly, each of these is a cause of concern:
- India Grid Investment Trust will receive funding from the existing global marquee investor KKR in tranches. The first two tranche payments have been made, while the third one is due in 2021. This means that the trust will be flush with capital.
- Now what remains to be seen is how the India Grid Investment Trust has been making money. The chief source of revenue is to acquire AAA-rated plants and run them as efficiently as possible. However, this has not been generating a lot of cash and thus the company is forced to take on more and more debt, so much so that they have been funding their unitholder payments via the debt-money!
- India Grid Investment Trust borrows funds using term loans in 2017 at a rate of 9%, equivalent to an AA rated company in India and then extends them to its subsidiaries at a rate of 15%. The difference is pocketed.
- What remains to be seen is how well the company performs once the KKR is done buying its stake in 2021 and the debt will finally start coming due in 2022. As Warren Buffett says, as the tide recedes, we will know who was without shorts. The real testing times for the India Grid Investment Trust are yet to come.
- Beta of India Grid Investment Trust
- Running a straight line regression against the stock price of India Grid Investment Trust and the NSE 1000 stocks generates a beta of 0.03, which is a very small number. This means that the company’s stock price does not vary much, that is, there is very little volatility.
- Moat of the India Grid Investment Trust
|Brand Power||Commodity business, brand power does not really matter|
|Patents/IP||No research-heavy business, no such patents or IPs to ward off competitors|
|Regulatory Licensing||Heavy regulations on running the power plants as well as the SPV Trust|
|Corporate Culture||No such example of corporate excellence|
|Cost Advantages||Large portfolio of assets may allow some elasticity in pricing, no market-making capability, electricity prices are capped and regulated by the government in many states|
|Network Economics||Large benefits of having many km of transmission lines, comes down to how well the company negotiates the pricing with the customers|
|Customer Switch And Churn||No such addictive/unique product, the customers may be very easy lured by other power plants, the SPV may enjoy some trust among shareholders thanks to the impressive list of marquee investors|
- Operating Cash Flow:
- There has been a massive increase, mostly because of the new plants that the company has acquired.
- Investing Cash Flow:
- India Grid Investment Trust has been investing in new plants and acquiring them. This is the reason behind these large negative numbers. These numbers shall continue to be negative in the time to come as the company will acquire more and more plants and transmission lines.
- Cash From Financing Activity
- India Grid Investment Trust has large cash inflows and only once did it have an outflow. The outflow was due to the debt that was repaid in its entirety in 2018. In 2020, the trust sold a major share to KKR and raised capital by way of term loans and Non Convertible Debentures. The interest payment starts only in 2022, while in 2021, the trust receives the last payment tranche from KKR. Hence for the time being the company will be flush with capital.
India Grid Investment Trust Ratio Analysis
While the OPM and NPM were of similar levels in 2018 and 2020, there was a steep fall in 2018. This was because of the debt repayments that the trust had to make.
These numbers are expected to stay consistent in the future to come and may even improve as the newly acquired assets start to churn out profits.
The interest coverage ratio tells us how much profit a company makes compared to every Rs 1 of interest it is obligated to pay. Anything above 3 is considered to be a good number.
In our case, the ratio took a slight dip in 2019. The DE ratio record how has the company been funded, using debt or equity or both.
This is number must be close to 1, which means that the amount of debt and equity the same. The ratio breached 1, despite the fact the company increased its borrowings greatly this year. This has been fueled by the stake pick up by KKR.
Current Ratio measures the ability of a company to meet its daily working capital requirements. It must be more than 1 so that the company has enough assets to meet its current liabilities.
The ratio in the trust’s case has been slowly gaining strength and has breached 1 in 2020.
India Grid Investment Trust has a dividends yield of 10%. The best way to compare this number using the Graham Dodd’s test of the Bond Yield.
A stock must pay in dividends more than what government security would pay over similar periods. The difference is the Margin of Safety for the stock.
This metric is especially useful in the case of an investment trust as it is obligated to pay dividends at fixed intervals of time. The current GSec yield in India is around 5.7%, while the stock has a Dividend Yield of around 10%. The difference of 4.3% acts as good Margin of Safety.
India Grid Investment Trust Company Data
India Grid Investment Trust is rather unseen before kind of venture in India. It is a unique SPV, which intends to benefit from acquiring high-grade AAA power generation projects and transmission lines.
It is also obligated to distribute 90% of its cash holdings to its unitholders (the obligation to deliver dividends to the unitholders as well as 1 unit equating to 1 vote on the board makes it a rather different sort of an instrument which is not exactly a share nor exactly a bond, but combines some features of them both, hence the word unit is used).
The idea behind this is to consolidate the highly segmented power generation industry of India and generate quality dividends alongside. This makes it an enticing stock.
However, apart from the risks that the trust faces due to operating in the Power generation business, it also has to meet these dividend payments each quarter. In the last year, India Grid Investment Trust distributed more than its actually made, by way of debt and equity that it has raised recently.
This, not a particularly exciting proposition, as the capital or debt, does not really last forever.
Meeting dividend payments using debt is not a new feature in India, several companies do it all the time, but they have to eventually pay up in the longer run, no matter how sweet the dividends may feel now.
These “assured” dividends are absolutely assured throughout the next year, as the company will continue to get more capital from its investors, will have not debt repayment and has a tax shield.
The real test lies after 2021 when the capital steam will dry up and the trust will have no option but to perform and deliver.
Barring this, India Grid Investment Trust seems to have no other underlying financial issue and is a decent stock to own. 2021 will witness quite a lot of stock price appreciation as well as better dividends. The stock is not very volatile either.
However, as Ray Bradbury has said:
“Insanity is relative. It depends on who has who locked in what cage.”.
So only the future will reveal the reality.
This post has been written by Khubaib Abdullah for FinMedium Research Desk.
Cover Image: WION News