Indigrid InvIT: High yield on stable and predictable revenues

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I attended Q3FY19 conference call scheduled on Jan 15 2019 by IndiGrid Trust. Please note that there is scope for communication error at my side and hence reader shall also read transcript of con call which shall be available shortly.
https://www.indigrid.co.in/download-investor.html

Find enclosed key points discussed in conference call:

1) New unit issue and SEBI guideline:

The trust has got approval from SEBI to raise new capital. SEBI has also finalised guideline for QIP by InvIt. The key points of guideline are similar to that for equity issue. The investors which are not strictly QIP for equity private placement, can also be investor in InvIT as per SEBI guideline. Second point of difference is issue of InvIT issue price can not have discount to last two weekly average trading prices. There is possibility of discount in Pvt. placement of equity shares (Not sure for this statement). While the sponsor can increase holding from open market upto 75% of outstanding units, in QIP it can invest only upto 15% of unit issued after QIP to align with SEBI guideline.
The management was asked about the future plan of issue of new units under the guideline, particularly, if same being issued at current price (say around 88). Such issue may have dilutive impact for existing investors. The management responded that they would consider new assets and align issue of unit in such way that it is accretive to expected IRR of 12%. Even if issue happen at 88, they still have lever to negotiate price of new assets acquisition, which they may discount at higher cost of capital for acquisition and hence existing investor would not have any adverse impact of dilution at lower price. The management said while in equity issue, there is no specific purpose of investment, in InvIT, there is specific utilisation is for acquisition of new assets and hence there is scope to manage/improve the IRR even with lower price issue.

2) Ownership of assets at end of contract:
The current outstanding tenure on contract is around 30+ years for the InvIT assets. At the end of 30 years, in case, central authorities are intended to acquire the assets, they need to auction the transmission assets. The value received in auction would be given as purchase consideration to InvIT and same shall be remitted back to unit holder as capital return.
The terminal value at end of 30+ years assumed is around 3-5% of current NAV of units due to long duration discounting of cash flow.
On softer side, the management said that the value of assets is going up significantly due to recent change in regulation. The new regulation require Transmission line operator to pay nearly 50% of land value for area of land over which transmission line is covering for farm and 75% of land value for Area of transmission tower in agri land. With normal inflation, after decade or so, the cost of replacement would be significantly higher. Secondly, with increasing population and limited land, it would be very difficult for anyone to set up new line and hence existing line would continue to provide benefit to owners.
Further, while there is lot of development in power generation, particularly in renewable energy, there is not significant development in technology to transmit power generated to user, Hence, transmission line has low obsolence risk at this stage given the current technical development.

3) Debt funding and new pipeline:
The trust has mix of INR and USD debt. USD debt was raised as project funding for infrastructure assets which were subsequently acquired by the trust. The residual maturity of USD loan is around 4 years. The trust has fully hedged the currency risk and interest risk by entering in principal and interest rate swap. Even the rupee debt cost is fixed with weighted average maturity of around 8 years (the tenure of loan is around 15-16 years but due to loan repayment schedule weighted average maturity is around 8 years).
About new pipeline, they intend to consider sponsor as well as third party assets which are already commenced. In case acquisition value is around 200 CR, then there is no need to raise further debt/unit capital. However, in case acquisition value is higher than 500 cr then the InvIT has to issue new units as well as debt to fund the assets. With SEBI approval in place and past 7 quarter distribution track record, the investment manager is confident to arrange the requisite funds for new assets at short notice.

4) Increased working capital during 9 months:
During the Nine months in FY19, there has been constant depletion in cash reserve which has resulted from increase working capital (mainly receivable) requirement. The receivable increase is partly explained by acquisition of new assets. Once the trust acquired new assets, on billing for 60 days, it needs to fund as normal working capital. Third months onward payment is received and that 60 days become long term working capital requirement. Secondly, when there is revision on tariff value of existing amounts, similarly two months funding results in higher working capital requirement of incremental amount.
One more factor is typical way government spending happen in some of areas which are loaded in favor of Q4. So in some activities, while the billing happening during the Q1-Q3 quarter, total funds for full years are received in Q4. There was also advance insurance premium of Rs 10 Cr which was paid in First quarter and has resulted in partial increase in working capital requirement.
So Management said that increase working capital requirement is normal and nothing worrisome. Some part of release in working capital would happen in Q4FY19. They also intend to carry cash reserve of around Rs 50-51 Cr as on March 31 2019 which is at same level as Dec 31 2018 for future funding of incremental working capital.

5) Other miscellaneous points:
Some investor suggested whether InvIT is exploring buyback considering the moderate discount in market price viz NAV. The management reverted that since nearly 90% of available fund are distributed to investors, there is limited fund to finance buyback. The sponsor and other investor may look into investing if they find attractive discount to running NAV of InvIT.
When asked about sponsor view on increasing stake, the management said while in past sponsored has increased its investment in units, being investment manager of trust, he cannot response on behalf of sponsor which is an independent entity from investment manager.
There were also question about revision in SEBI guideline to which investment manager responded that being a member to advisory committee, he would not like to comment of specific issue. However, in media article there are discussion about widening scope of investor (including insurance company as investor in InvIT) and reducing lot size to increase participation.
Last, they were asked about what is expected distribution for unit holder assuming there is no new acquisition of assets in trust. The management indicated that they would aim to distribution Rs 3 per unit for next 12 quarters (3 years) even if there is no addition of new assets in InvIT.

Discl: I am existing unit holder of IndiGrid InvIT and hence my view may be biased. I am not SEBI registered investment advisor. The investor shall consult his/her investment advisor and do proper due diligence before making any decision.

9 Likes
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IRB Invit is far cheaper & as good.

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How do you calculate that? Based on current yield yes it might be but correct way to evaluate is IRR and stability of the IRR. Both offer 12% IRR @100 but IRB has fallen more to adjust for much higher risk from projected economic growth and inflation side.

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If you buy it today, you are going to be paying today’s price not Rs. 100

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After sitting on the fence since writing the opening post, I finally invested in Indigrid InvIT this month. Received the distribution of Rs 2.7 per share against Rs 3/unit as declared by the company. I am assuming 10% TDS has been deducted since the distribution for this quarter is entirely interest payment. Is that right?

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Yes. On amount distributed as Interest there is 10% TDS. Amount paid back as Principle or Dividend has no TDS

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Those interested in INVTs, please go through this consultation paper issued by SEBI.
https://www.sebi.gov.in/reports/reports/jan-2019/consultation-paper-for-amendment-of-sebi-infrastructure-investment-trusts-regulation-2014-and-sebi-real-estate-investment-trusts-regulation-2014_41840.html

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Proposed changes are positive for existing as well as new investors:

  1. Proposed leverage limit to 70% v/s existing 49%. This will allow InvITs to own more assets and offer greater return to investors.
  2. Minimum lot size to be reduced to 100 v/s existing ~ 5000.
  3. Allow privately placed and unlisted units
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In my opinion, first proposed change has positive impact for Investor due to leverage, it is not abosultely beneficial to investor. While Infrastructure assets have longer life and stable cashflows, still increase in leverage would increase the riskniess of instrument and hence investor yield expecations shall also increase. So I do not see major benefit for existing investor.

Second one, may increase liquidity as investment size would reduce from Rs 4 Lakh for one lot to Rs 8000. So I see this may be positive impact on price due to better liquidiity and increased retail participation.

The third change would have no impact for retial investor except that it may reduce availability of new opportunity as unlisted InvIt also can be issued.

Most important, the proposed changes are for consulation with public. So these are indicative changes. The final change would be known only after SEBI issue circular post public comments.

Overall step in positive direction. There is no mention about buyback of unit by Trust in case it find the unit is trading at attractive valuation vis a vis new assets. Since the trust distribute at least 90% of available cash as distribution, there is limited scope for buyback. But still, it should have considerded and provided for window of buyback of units (even if small amount) from open market in case yield are accretive for the investor in my opinion.

Discl: My view may be biased due to investment in India Grid and IRB InvIT. Invesor shall do his/her own due diligence before making any decision. I am not a SEBI registered investment advisor.

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I fully agree with you. I now urge everyone over here to give their comments to SEBI, in format mentioned under page seven, either by Email or by Post ,before 18th Feb.

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But how you guys are valuing it ? Its still much attractive to buy at 9.5% yielding manappuram or Muthoot NCD then buying this … As in case of INVIT we are not getting any principle back on maturity.

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why do you need to ask Invit to return principle? this is a perpetual yield vehicle and could be sold in the market any working day. Invits are valued on IRR basis and at this current valuation it would give 13%+ pre tax IRR over very very long term. There is no asset with the kind of certainty of cash flow unless we stop using electric grids. Additionally, we are seeing decline in nominal interest rates every decade and barring current liquidity issue you might not get 10% interest from AA rated ones and here invit having AAA is giving you 13%+. I am also anticipating capital gains 3 yrs down the line.

Disc: have investment here in family accounts

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you should look at the above thread mate to understand what will be the cash flow , It will drop to 7 after 5 years and i think markets are right now skeptical whatever management is projecting about future injection of assets that will produce higher cash flow.

Secondly , the AAA rated means nothing here Vs a AAA rated bond bcoz here is Cash flow could go for a toss you will not get Rs 12 dividend something lower but company can remain AAA ( bcoz still chances of defaulting will be less or nill )

I don’t think you understand this asset well based on ur reply , Have you run any calculations to say okay its trading at fair value considering these are the risks and these will be the future DPUs ?

I don’t find it anywhere any attempt to do these calculations and then discuss the thesis based rationale. Its sin to assume IRR will remain 14% .

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DPU might fall and rise yoy but when my IRR is protected due to certainty of cash flows, I need not worry too much. The company is confident of giving 12 dpu for the next 2-3 yrs and with the recent changes in regulation by SEBI it might raise debt from 50% to 70% and further provide margin of safety.

The fall here is also due to the fact that it had similar investor profile as equity markets and some of them have bailed out for obvious reasons. Many bond traders are utilising cash to deploy in opportunistic bets opened in the recent liquidity issues. Second, AAA rating has come under scanner due to ILFS issue. The tentative DPU profile was well known to everyone including large institutions and it was well subscribed @100 and nothing has changed to reevaluate cash flows at least for IndiGrid. IRB infra has much more volatile and uncertain cash flows so I stay away despite more attractive current yield.

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Hi, I have not studied the asset in detail but what would be the reason for DPU fall ? Aren’t all those assets owned till around ~ 2049

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Please read the thread above

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Power sector may be heading into trouble.

DISCOMs (electricity distribution companies) across the country have been delaying payments to power producers, as they are struggling with losses. The above article states that unpaid dues are estimated to be worth Rs 60,000 crores.

Large scale defaults by DISCOMs to Power Grid, for using transmission assets, could adversely affect Indigrid cashflows.

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I think all kinds of issues being encountered by the Invits. Liquidity issues was not enough to trip them and now denial of extension of loans.

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My understanding is RBI is trying to stop financing at Trust level, since underlying companies can raise debt at their level and that should reflect at consolidated debt on the books of trust.

Uday failed miserable.

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If the trust is not raising funds at corp level, how would they grow and acquire new assets. Also, don’t understand why power generation companies are showing a very stable price trend in the market while they are the most impacted by Uday’s failure. I think Govt of India might deduct outstanding from their budgetary allocations.