Around ₹2.9 lakh crore is expected to be invested upto FY29 in the power transmission industry in India, as per Central Transmission Utility of India’s Rolling Plan 2028-29.

With power demand reaching new heights with each passing day, having a robust transmission system is more a necessity, than a requirement. And at the heart of this sector operates Powergrid Infrastructure Investment Trust (PGInvIT), which is in the business of investing, owning, operating and maintaining power transmission assets in India. bl.portfolio had earlier covered this counter with an accumulate call on July 25, 2023, followed by another accumulate call on October 18, 2023. The pre-tax yield is around 12 per cent since our last call, and adjusting for around 10 per cent correction in the unit price, the net return is around 2.6 per cent.

While returns have been low, we had mentioned last time that investors buying into the counter must do so with a long-term perspective. We continue to believe that this counter offers good investment opportunity for long-term investors: One, strong operating metrics and flat yet consistent distribution yields well above regulatory requirements. Two, strong sponsor in Power Grid Corporation of India – India’s largest transmission company (in terms of length of transmission lines). Three, strong industry tailwinds. Four, rate cut cycle in India is ever so close now, with Fed blinking first a few days ago. In high interest rates scenario, investors expect higher yields from InvITs which might keep the unit prices under pressure. But come rate cuts, stable yields and lower opportunity costs can make a good case for capital appreciation. And thus, investors looking for a defensive, stable and proxy play on the thriving power sector, can look to accumulate PGInvIT at current levels.

Business

PGInvIT owns and operates five operational transmission SPVs, purchased pursuant to the IPO in 2021, spread across five States. As and when the SPVs earn cash flows, they pass it on to the InvIT — its net distributable cash flows (NDCF). Rated AAA, the trust, through its SPVs, owns 11 transmission lines running across 3,698.6 ckm (circuit km). While one asset is fully-owned, the InvIT holds 76 per cent stake in other four assets, with Power Grid holding the remaining stake.

There are two types of projects in power transmission – TBCB (tariff-based competitive bidding) and RTM (Regulated Tariff Mechanism). TBCB tariffs are lower compared with RTM’s. All the five assets of PGInvIT are TBCB projects.

Solid operating metrics

The target normative technical availability for an InvIT is 98 per cent. Availability, in the context of power transmission, refers to the period for which the lines are capable of transmitting electricity, and not out of service. PGInvIT boasts of availability at over 99 per cent consistently since commencing commercial operations. In FY24, it was a notch better at around 99.9 per cent.

SEBI mandates a minimum of 80 per cent investments in operational and revenue-generating assets. Currently, all assets of PGInvIT are revenue generating, posing zero development risk. PGInvIT also offers solid revenue visibility with around 80 per cent of the InvIT’s revenue based on fixed tariffs from availability-based long-term TSAs (Transmission Service Agreements) and average remaining contract life of the TSAs at around 28 years, as of Q1 FY25.

Coming to distribution, PGInvIT has been consistently giving out ₹3 per unit per quarter during FY23 and FY24. And the same guidance has been extended to FY25. Regulations mandate InvITs to distribute at least 90 per cent of NDCF to the unitholders, at least once every quarter. But PGInvIT has been shoring the current level of distribution with its cash reserves, meaning it has been paying out more than 90 per cent of its NDCF.

Tweaked regulations, effective from April 2024, mandate NDCF computation at the level of InvITs and SPVs with minimum distribution being 90 per cent of NDCF at both levels, effectively leaving the investors entitled to least 81 per cent of NDCF from the SPV level.

PGInvIT is yet to add to its initial portfolio of assets and purchase the remaining 26 per cent stake of its four portfolio assets from Power Grid, even though the lock-in expired between FY22 and FY24. The management expects to complete the acquisition this fiscal. PGInvIT is also expected to benefit from the Ministry of Power’s monetisation targets with regard to State-held transmission lines.

And as far as acquiring assets outside the sponsor’s arc goes, the management cites the lack of operational transmission lines at reasonable valuations. But the scenario is expected to improve, with many assets expected to be operational in the next 12-18 months.

Healthy Net debt to AUM

PGInvIT’s net debt to AUM is at an enervated 0.3 per cent. This metric can go upto a limit of 70 per cent as per regulations, provided the InvIT is AAA-rated and has made at least six continuous distributions, both of which PGInvIT comfortably qualifies. IGT, to compare with, has this ratio at 61 per cent. Acquisition via external debt is the usual route taken by InvITs as it saves the unitholders from any dilution.

InvITs typically enhance their earnings by using leverage to acquire assets where the ROE is higher than the tax adjusted cost of debt. Thus, given the huge expanse available in the net debt to AUM metric, any acquisition opportunity found could be comfortably funded through debt, which will augment revenue and cash flows for PGInvIT.

Our take

InvITs, which are usually purchased for stable distribution yields, resembling debt instruments, wear a cloak of equity for taxation purposes. While distribution gets taxed at marginal rates similar to debt instruments, holding period for categorisation as long term is just one year for listed InvITs and it is two years for debt instruments. Long-term gains are taxed at 12.5 per cent for both debt and equity while short-term gains are taxed at marginal rates for debt, while it is capped at 20 per cent for equity, and in this case InvITs.

While peer India Grid, though, has been consistently growing (AUM grew from ₹5,200 crore as of March 2018 to ₹29,255 crore as of June 2024) compared with PGInvIT, which hasn’t been able to add to its assets. bl.portfolio also has an accumulate call on IndiGrid latest dated Jul 6, 2024. However at current price levels, distribution yields and low net debt to AUM work in PGInvIT’s favour.

There is an inherent risk of current distribution dropping for PGInvIT, if new assets are not added. But adequate pessimism seems to be factored in, thus limiting the downside risk. Investors looking to diversify or revisit their portfolio allocation can consider InvITs, albeit with a strong track record, as an alternative to equity and debt instruments and as part of asset diversification strategy. While PGInvIT fits well here, it is important to note that investors need to have a long-term perspective as it may take some time for acquisitions to play out and getting reflected in business/NDCF growth.

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