On a year-to-date basis, the units of Powergrid Infrastrucuture Investment Trust (PGInvIT) have fallen around 22 per cent, while dip is around 17 per cent after adjusting for distribution per unit (DPU) of around ₹6.
Does this present an investment opportunity or do the investors need to wait and watch? Read on to find out.
Business scenario
PGInvIT owns and operates five inter-State power transmission assets and is sponsored by India’s largest transmission utility—Power Grid Corporation of India (PGCIL).
PGInvIT poses less risk as all of its assets are operational against SEBI’s mandate to place 80 per cent of investments in the projects that are operational and generating revenue.
These assets earn revenue based on the fixed tariffs on their long-term transmission service agreements (TSA) of around 35 years (residual tenure being around 29 years), provided normative availability of 98 per cent.
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Except one, all other SPVs are inter-State power transmission projects and thus, operate under the point of collection (PoC) mechanism where transmission charges received from different customers are aggregated into a pool and then disbursed to the transmission service providers, ultimately reducing the counterparty risk.
Why has it been weak YTD?
The weakness in the unit price might be on account of stagnation in addition of assets and lack of clarity around acquiring the remaining 26 per cent stake in assets held by the sponsor Power Grid Corporation. Consequently, the annual distribution has been maintained at ₹12 per unit by dipping into cash reserves, and thereby providing an attractive pre-tax yield of around 12 per cent.
Currently, it is unable to add assets on account of high interest rates and limited availability of operational assets.
What should investors do?
The weakness in unit prices appears to be a short-term issue. The power transmission space will present promising opportunities over the next 7-8 years.
Except the assets acquired during listing, PGInvIT has not made any new acquisitions, resulting in low debt levels.
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According to the management, the transmission sector offers significant opportunities as projects worth about ₹31,000 crore are under the bidding stage and projects involving 50,000 circuit km are expected to be rolled out by 2030
This was one of the reasons why we gave an accumulate call on PowerGrid InvIT in our bl.portfolio edition dated July 23, 2023. Since then, adjusted for distributions/dividends, the unit prices have come down by 10 per cent. In the near-term such movements are normal. .
PGInvIT is well placed to tap in to the long-term opportunities in power transmission space on account of net debt to AUM being as low as around 1 per cent i.e. far lower than the prescribed limit of 70 per cent, providing significant headroom for debt funded acquisitions in the near- to medium-term by avoiding other routes of capital raising such as rights issue, sparing investors the risk of dilution.
Trading at around 12 per cent yield, the units are attractive as InvITs offer decent annual yields and long-term appreciation.
InvITS tend to outperform when interest rates start declining, as their distribution yields get more attractive. As we don’t see any changes to the macro scenario which we explained in our article published on July 23, we maintain our accumulate call and investors can add to positions at current levels.