The Centre’s target of achieving nearly 500 GW of installed renewable energy (RE) capacity by 2030 necessitates significant investments in the transmission space. The Central Electricity Authority (CEA) estimates that ₹2.2-lakh crore will be required for inter-state transmission system (ISTS) from FY24 to FY28. Additionally, the CEA projects a need for around 47 GW of Battery Energy Storage Systems (BESS) by 2031-32 to ensure grid stability as RE’s share increases.
IndiGrid InvIT is strategically positioned to benefit from these developments. By diversifying its portfolio to include RE generation and BESS, IndiGrid is enhancing its growth prospects.
Amid soaring valuations of power and utility stocks, IndiGrid InvIT offers an appealing investment opportunity by providing steady income through regular distributions and potential capital appreciation, supported by long-term Transmission Service Agreements (TSAs) and Power Purchase agreements (PPAs) for solar assets.
On a YTD basis, while IndiGrid’s unit price has appreciated by 5 per cent (10.7 per cent including dividends), it has remained flat over the past year due to prolonged high interest rates while it has returned around 11 per cent, considering dividends. Investors expect higher yields from InvITs in such environments, which can keep unit prices stagnant. However, this scenario presents an opportunity for accumulation for long-term investors. Capital appreciation is likely when benchmark interest rates eventually decrease, and as IndiGrid continues to expand its asset base.
Business
IndiGrid, India’s first listed Infrastructure Investment Trust (InvIT), focuses on inter-/intra- state power transmission and solar generation assets with an assets under management (AUM) of ₹28,327 crore. Sponsored by global investment firm KKR (holding 21 per cent stake), IndiGrid adheres to SEBI mandates requiring sponsors to set up the trust and maintain at least a 15 per cent stake. Since its inception in 2017 with two power transmission assets, IndiGrid has expanded its portfolio to 39 projects, including 17 operational transmission projects, three greenfield transmission projects, and 19 solar generation projects.
IndiGrid’s revenue is predominantly derived from its power transmission segment, which contributed 85 per cent of its revenue in FY24. The remaining revenue comes from the solar power generation segment. The InvIT benefits from long-term TSAs model with an average residual tenure of 26 years compared to other InvITs such as road, which depend on toll collections and traffic growth. Furthermore, the Point of Connection (POC) mechanism applied to most of IndiGrid’s transmission Special Purpose Vehicles (SPVs), which involves centralised collection and distribution of transmission charges, mitigates counterparty payment risk.
In the power generation segment (IndiGrid’s solar power business), revenue is contingent on the quantum of power generated, introducing potential fluctuations due to intermittency challenges.
Performance
Since its inception, IndiGrid has consistently achieved a plant availability factor exceeding 99.5 per cent, surpassing the normative level of 98 per cent, enabling it to recover annual transmission charges effectively. In April 2024, it commissioned its first greenfield inter-state transmission system (ISTS) project, Kallam Transmission Ltd, acquired under Tariff-Based Competitive Bidding (TBCB) in December 2021. Additionally, IndiGrid secured three more ISTS-TBCB projects during FY24, expected to be operational within the next 18-24 months.
On the solar generation front, IndiGrid significantly expanded its portfolio during FY24 with the acquisition of Virescent Renewable Energy Trust (VRET) and ReNew Solar Urja Pvt Ltd (RSUPL), boosting its solar capacity tenfold to over 1 GWp (giga watt peak). VRET comprises 16 operational solar assets totalling 538 MWp, with long-term PPAs with entities such as SECI, Gujarat Urja Vikas Nigam Ltd, and NTPC Vidyut Vyapar Nigam Ltd. Further, RSUPL adds 420 MWp capacity with PPAs extending for around 23 years with SECI, ensuring long-term cash flow visibility.
Solar assets now constitute around 20 per cent of IndiGrid’s total AUM while it is constrained to a maximum of 25 per cent without further approval from debt investors. Notably, the trust has forayed into BESS projects during FY24, bagging two orders that are expected to cumulatively generate ₹107 crore with a concession tenure of 12 years post commercialisation, as per company filings.
For FY24, IndiGrid reported a 22.8 per cent increase in revenue to ₹2,864 crore and a 17 per cent rise in EBITDA to ₹2,538 crore, driven by strategic acquisitions. However, the EBITDA margin contracted by 4 per cent to 88.6 per cent, attributed to one-time expenses such as integrating Virescent and incentive fees for the investment manager. Nonetheless, Net Distributable Cash Flows (NDCF) rose by 22 per cent to approximately ₹1,103 crore.
While earlier an InvIT was supposed to distribute 90 per cent of its NDCF, in December 2023, SEBI revised the NDFC calculation norm effective from April 2024. Under this new rule, the NDCF will be computed at the level of InvITs/REITs and their holding companies (HoldCo) or special purpose vehicles (SPVs) with the minimum distribution being 90 per cent of NDCF at both levels. So, effectively, investors are entitled to receive at least 81 per cent of NDCF (90 per cent from SPV to IndiGrid and 90 per cent from IndiGrid to investor). As on March 31, 2024, IndiGrid reported a net debt to AUM ratio of approximately 62.4 per cent, comfortably below SEBI’s mandated cap of 70 per cent.
Prospects
IndiGrid has consistently distributed at least ₹3 per unit quarterly since Q4 FY18, with distribution guidance increasing to ₹3.75 per unit for FY25, offering investors a pre-tax yield of around 11 per cent. Distributions from IndiGrid InvIT can take the form of interest, dividends, or capital repayment. Dividends are taxable based on investors’ tax brackets if the InvIT’s SPVs qualify for concessional tax treatment. Capital repayments were previously non-taxable for investors, but Finance Bill 2023 introduced taxation on a portion, calculated after deducting the acquisition cost from the distributed amount.
IndiGrid’s proactive expansion into renewable energy and storage system, coupled with robust financial performance and compliance with regulatory frameworks, positions it as a resilient investment choice in India’s evolving power generation and transmission sector.