Power grid - a superior alternative to Invits

Can you pls elaborate, game changer for INVITs or for Power grid and why?

My understanding is as below:

  1. Success of this one would help them understand the appetite of market and more such projects can be brought under INVITS and at better prices - note that 74% is what is proposed to be transferred to the INVIT which means it’s only a partial exit and POWERGRID will continue to be a beneficiary from these assets(26% equity interest).
  2. INVIT will help reduce the balance sheet size, boost cashflows in the near term, reduce debts and finance cost which would help drive growth and return ratios for shareholders.
  3. The perception about this stock would change significantly(my understanding is that currently the market is valuing the company only based on its dividend yield similar to other government run companies) - once the market understand that the company is serious about cash flows and return ratios, quality share holders will get attracted which will lead to the rerating.

Disclosure: Invested and biased.

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more specifics from bs article
powergridinvit.pdf (55.7 KB)

As Powergrid Invit is opening from 29.04.2021, would request senior members give their views on the same. Also whether one should apply for IPO or wait for listing and then decide ?

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Here are more details about powergrid invit (BQ interview, CNBC interview):

  • Issue size: 7734.9 cr. (2741 cr. offer for sale + 4993 cr. fresh issue)
  • All underlying assets are operational (varying from 2-4 years)
  • Good track record of availability (98%+)
  • Asset life can be close to 50 years, tariff agreements are done for 35-years, residual life for the current Invit assets is 32 years
  • Assets worth 23’500 cr. will be made available for monetization in the coming few years from powergrid, of these 5’000 cr. are currently operational and rest are under different stages of construction.
  • The Invit will also be open to acquiring assets from other SPVs which are not sponsored by powergrid
  • Average cashflow from operations of assets are estimated at ~1150 cr. in the first 3-years, 90% of this will be given to Invit of which 90% will be passed on to the unitholders
  • Initial stage: No debt on Invit, going forward debt will be used to fund further asset purchases. Trust will be able to fund debt at competitive pricing because of AAA status of powergrid
  • The current plan of powergrid is to monetize TBCB assets through Invit structure

Disclosure: Invested (position size here)

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IPO Note by HDFC Securities https://www.hdfcsec.com/hsl.docs//POWERGRID%20Infrastructure%20Investment%20Trust%20IPO%20Note-202104281958195424232.pdf

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Thoughts on the INVIT yield and OD source

IPO note from Prabhudas Liladher
“At upper end of price band, we expect PGInVIT to generate an IRR of ~9%, over the life of assets”

Another broker (GEPL Capital) note
Investors can expect a pre-tax yield of 9 to 11% based on the utilization of funds to repay the SPV level debt.

Another interesting point on merchant bankers past performance:

MERCHANT BANKER’S PERFORMANCE:
The four BRLMs associated with the offer have handled 36 public issues in the past three fiscals including the current financial year, out of which 16 issues closed below the issue price on the listing date.

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There has been lots of discussion on the yield offered by the Invit. Management on the concall categorically stated that the average distributable cashflow from operations of assets are estimated at ~1’125-1’200 cr. in the first 3-years (at the invit level). 50% of this should be given as interest and 30% as dividend and rest as redistribution. This translates into a net yield of 11%+ at a market cap of 9100 cr.

Now looking at their own projections, average revenues from their assets comes at ~1269 cr. over the next 3-years. At 97% EBITDA margins, this translates into EBITDA of ~1231 cr. Now, the Invit owns 74% stake making the EBITDA ~910 cr. at the Invit level. They are supposed to payout ~90% of this translating into ~820 cr. net distributable cash. This translates into a post tax yield of 820/9100 ~ 9%.

So there is a discrepancy between management guidance and the actual numbers.

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There have been excellent discussion on this, thanks to all contributors.
If you were to compare one aspect of Indigrid vs powergrid Invit -

  1. Sponsor and Management Integrity/Corporate governance/Management capability/alignment of interest of Management, Sponsor and retail shareholders (all these aspects are interrelated and depends on the Sponsor/Management) - Which one would fare how and why do you feel so?

Is corporate governance in Powergrid not top notch and so the management capabilities? I was of opinion that first time I am getting an INVIT/REIT from a completely trustworthy long term vision Sponsor - like Powergrid (a Navratna PSU) something comparable to say an RIL/TATA etc in Private firms as quality of sponsor and not from anyone from builder community or a PE.

But above discussions make me doubt some things - why is management projecting something not correct? Even 9% post tax is not that bad (compared to Indigrid at today’s price). So I see no need for them to hide anything. Is it that we are not understanding anything correctly here?

Lastly if this INVIT is not worth investing because of management capabilities/sponsor then is Powergrid equity is?

PGCIL’s ROE is likely to go up by ~3% from FY22 onwards & dividend yield likely to increase to ~8%+…

Instead of its own Invit or Indigrid Invit (~7.5-8% IRR), PGCIL Stock is a much better opportunity, and its Invit getting listed at 8-8.5% kind of IRR is making it all the more attractive.

PGCIL is likely to report ₹25/ EPS in FY22, excluding gains from its Invit stake sale (~3.5-4/ sh post tax). What is more interesting is that this Invit stake sale gains is likely to continue for many years with 4 year visibility already there (₹20k crore assets already in hand to be transferred gradually over next 4 years). PGCIL invests very low equity in these TBCB projects & at 8-9% IRR transfer, it is likely to get 3-4x invested equity (as it got in initial portfolio of Invit).

Its book value FY22 end is likely to be ~₹145/share. With ₹29/sh EPS in FY22, ROE is likely to go up from 17% in FY21 to ~20%+ in FY22 and is likely to remain there in medium term at least…
Looking at the growth opportunity in the range of ~8-10%, PGCIL needs to retain ~₹10/sh per year out of ₹29/EPS in FY22. Rest it can pay dividends. Expect ₹18-20/sh dividends in FY22 vs. ₹13.4 it paid in FY20 (8% + dividend yield).

So essentially this company will have;
8%+ dividends yield which is likely to grow by 8%
Consistent ROE of 20%
EPS Growth of 8-10%
Available at PE of 7x FY23 & 1.5x book
And there is low risk to its current earnings

I think in a market where 20% ROE companies are trading at exhorbitant multiples, this company’s increase in ROE (mainly due to Invit listing & planned regular transfer of assets) is yet to be appreciated…

Will be happy to provide any details, if anyone needs to evaluate in depth…

Disclosure:
I am not SEBI registered
This is not investment reco
Please do your due diligence before taking any decision
I bought the stock few months back, so my view may be biased

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@WizSeeker

You are absolutely right. Market values companies having 20% ROE with high PE. But most of those companies will have D/E ratio less than 0.5 or 0.6 (of course few exceptions are there).

For powergrid, debt to equity ratio is 2 and also PSU.

There would be a point when powergrid sets up

  • transmission network to cater the current transmission demand and
  • transmission network to cater future demand (say 3 to 5 years) from above point of time,

when above 2 are satisfied, this would lead to no new debt and it is just maintenance of existing networks which would be negligible cost. Major debt reduction would start here. The question is when this would happen :slight_smile:

In my understanding, as and when the debt reduces, market would start re-rating power grid and as we all know market will sense this much ahead…

Disc: invested and one of my largest holding.,… may be biased…Not a buy or sell recommendation … (latest position size here here )

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There is sudden spurt in dividend in 2019-2020…why is that so? Also, is your FY22 div calculation based on any dividend policy of the company?

Two Reasons:-

  1. PGCIL Capex used to be 20-25k cr per year, prior to FY20, which has reduced & likely to be around 10-12k cr starting FY21 (Equity requirement of ~4k cr). PGCIL has long been keeping retained earnings equal to Capex required & mostly paying the rest as dividend. From FY21 it requires ₹8-10/sh of EPS retention. Rest it is paying as dividend. So as per same calculation, it is likely to pay ₹18-20 dividend, given earnings increase to ₹29 in FY22 from expected ₹22.5 in FY21, due to growth & Invit IPO.

  2. Starting FY21, DDT has been removed, which led to 20% increase in dividend naturally

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Excellent set of numbers from PowerGrid. While the topline growth is about 3% QoQ (Q4 2020 to Q4 2021) and 5% for the full year (YoY), the cost of operations has improved by about 12.5% QoQ and 4% YoY primarily driven by significant drop in finance cost. The PAT before regulatory adjustments has grown by a whooping 69% QoQ from 23K for Q4 2020 to 39K for the current quarter and 24% YoY.
The investment into additional fixed assets has moderated and borrowings has reduced by about 7K YoY.
Clear sign of improving cash flows and the operating leverages playing out.
See the results here.

Dividends of Rs. 3 per share declared is in line with the expectation(Rs.12 for the full year including the interim).
3:1 Bonus declared(1 share for every 3 shares held) will improve the free float and help in improving the sentiment in the short run.

AJ
Disclosure: Invested and biased.

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PGCIL FY21 Results & Way Forward

Adjusted EPS FY21 = ₹24/sh (Reported ₹23/sh + one time rebate post tax ₹1.8/sh - prior period income ₹0.8/sh)

ROE FY21 = 18.7% (₹24 EPS ÷ ₹128/sh Avg Net Worth)

FY21 Dividend = 12/sh (FY21 Capex was ₹11000 cr)

****FY22…way forward

10% Growth in business + Invit sale profits

Likely FY22 EPS = ₹30/sh (₹24 FY21 EPS + ₹2.4 Growth + ₹3.5 invit Sale Profits)

FY22 ROE = 21.5%+ (₹30 ÷ 139 average net worth)
FY22 dividend = ₹18-20 (Capex plan for FY22 is ₹7500cr vs. FY21 was at 11000cr, plus additional profits from Invit may be paid out as dividends)

Valuations
Trading at 8x FY22 EPS & 1.65x book value,

With ROE 21%+ (likely sustainable, at least 20%+)
dividend yield 8%
Sustainable Growth of 8-10%

Note:-
I am not SEBI registered
Please do your own due diligence before taking any decision
Have not considered Bonus issue, as it will not impact the valuations at all (Price & EPS both will get adjusted)

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could you please help with how much the share price would fall by once the ex-date of bonus shares passes, at the current price of Rs 240?

240 × 523/698 or
240 × 3/4 = 180 price after bonus adjustment

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Thank you for calculating the info.

Yes seems right according to cmp.
Though, wouldn’t that calculation occur at the price on the penultimate day of bonus shares credit? Hypothetically, if bonus shares will be credited tomorrow then whatever price eod today will be used for the calculation, correct?