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In our bl.portfolio edition dated February 19, 2023, we had given an accumulate rating on the units of India’s first listed power sector Infrastructure Investment Trust (InvIT) IndiGrid for investors seeking regular income and capital appreciation over the long term.
Since then, it has delivered a total return of around 8.7 per cent, including price appreciation and distributions (including dividends) made to investors. The InVIT has been in the news in recent days after it announced a major acquisition. We assess what this means for the InvIT and unit holders.
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The deal
IndiGrid has signed definitive agreements for acquisition of 100 per cent units of renewables-focused InvIT Virescent Renewable Energy Trust (VRET) sponsored by KKR for up to ₹4,000 crore. VRET acquisition closure is expected in H1 FY24, subject to unitholder and regulatory approvals.
The transaction followed a competitive sale process that attracted interest from investors across the world. Apart from IndiGrid, domestic and global energy developers such as Jindal Steel and Power, Actis, and an arm of the International Holding Corporation of Abu Dhabi were among those participating in the bidding process.
What IndiGrid is getting
Through the acquisition of VRET, IndiGrid can get exposure to 538 MW of operational solar generation assets translating into an acquisition price of about ₹7.4 crore per MW. This means IndiGrid’s renewable portfolio can reach 674 MW post acquisition.
VRET’s portfolio consists of 16 different projects across seven states including Maharshtra, Tamil Nadu, Gujarat, and Rajasthan. As per a Crisil report, 100 per cent of VRET’s capacity is tied up with power purchase agreements (PPA), of which 93 per cent is covered by PPAs with a pre-determined tariff for tenure of 25 years while the balance is tied up for 12 years providing revenue visibility. On average, the portfolio has seven years of operational history with an average residual tenure of 18 years currently.
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For the majority of PPA, there are strong counterparties such as SECI, NTPC, and GUVNL while financially weak Tamil Nadu-based distribution company TANGEDCO is the counterparty for capacity of about 148 MW (27.5 per cent). ). Though the receivables with TANGEDCO still remain high, it has been reduced from 22-24 months to 9 months as of December 2022 due to late payment surcharge scheme for distribution companies.
The acquisition cost for VRET is coming around ₹7.4 per MW, which is higher than the ₹6.6 per MW of the assets already present in IndiGrid’s portfolio. However,the tariff for VRET’s assets is better at around ₹5 per kWh (as per management) compared to ₹4.43 per kWh (as per ICRA report) of those already present.
How does it affect IndiGrid?
Post-acquisition of VRET, IndiGrid’s assets under management (AUM) shall grow by around 18 per cent reaching nearly ₹26,900 crores. Solar generation assets from currently around three per cent of AUM, shall comprise around 17 per cent upon completion of the acquisition, with the rest being transmission-based assets. As per the management, the net debt to AUM shall rise to around 65 per cent versus the current levels of 59.5 per cent post the debt funded acquistion, while keeping it below the regulatory leverage cap of 70 per cent.
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However, the same can later come back to the sustainable level of around 60 per cent as the management seeks to raise up to ₹1,500 crore through institutional placement or rights issues at a future date.
While long-term PPAs provide certain revenue visibility, cash flows from solar power generation might not be as stable as those coming from the transmission assets on account of intermittency issues and counterparty risk which its transmission assets don’t face. However, this diversification provides scope for growth.
The business from transmission assets shall remain core for the InVIT while the renewable assets can go up to a maximum of 20-30 per cent. The management believes the acquisition to be accretive, which can provide additional net distributable cashflows of around ₹200 crore and can help increase the distribution per unit (DPU) by 2-3 per cent.
Further, the management has guided for a DPU of ₹13.8 for FY24 i.e. 3.4 per cent growth y-o-y on account of the acquisitions in transmission space made during FY23 while VRET acquisition can provide further growth in the same. This translates into a pre-tax yield of around 9.84 per cent at the current market price.
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Ultimately, on account of stable cashflows from transmission assets, acquisition pipeline, and attractive pre-tax yield of more than 9 per cent, we maintain our accumulate rating on the units of IndiGrid.
InVIT can prove to be an attractive investment option in times of market volatility and high-interest rate environment (like the current period) wherein you can get attractive prices and yields. Consequently, when the interest rate cycle reverses, investors can benefit from price appreciation along with the same pre-tax yield.
Hence, this, along with stable cash flows from its transmission assets, high pre-tax yield, and growing distributions make a case for investment in the units of IndiGrid InvIT.