What is InvIT? Should You Subscribe to PowerGrid InvIT IPO?

With the InvIT IPO of the state-owned company Power Grid Corporation of India (PowerGrid) on April 29, 2021, the InvIT space is getting crowded. The IPO will open for subscription on Saturday and will close on May 3, 2021. PowerGrid InvIT will be the third InvIT to be listed on the bourses after IRB Infra InvIT, which is backed by the GIC affiliates and infrastructure firm, and IndiGrid InvIT backed by Sterlite PowerGrid Ventures and KKR. The fourth InvIT to be listed soon is from the National Highway Authority of India (NHAI) Ltd.

Now, for investors, who would like to know what is InvIT and how it functions as an investment product. We will try to give details about it in the following lines.

What is InvIT?

An Infrastructure Investment Trust (InvITs) is a Collective Investment Scheme similar to a mutual fund, which enables direct investment of money from individual and institutional investors in infrastructure projects to earn a small portion of the income as a return. 

InvITs are designed to pool small sums of money from a number of investors to invest in assets that give cash flow over a period of time. InvITs are trusts that manage income-generating infrastructure assets, typically offering investors a regular yield and a liquid method of investing in infrastructure projects.

What’s on offer in PowerGrid InvIT IPO? 

PowerGrid is a schedule ‘A’ ‘Maharatna’ company incorporated in 1989 under the Companies Act, 1956. This listed company has 51.34 per cent holding of the government while the remaining holdings account for public and institutional investments.

This PSU operates under the power ministry and is the CTU (Central Transmission Utility of our country with the responsibilities of planning, development, and coordination of the interstate system for transmission. Their vision is to become an integrated and world class global company with dominance and leadership in power markets. They also aim to ensure safety and reliability. This company is diversified into consultancy and telecom business and provides services to international and domestic clients and has global footprints in 21 countries.

Being among the biggest transmission utilities in the world, this strategic PSU is crucial to Indian power development. They own and operate the inter-state network for transmission while maintaining the availability consistently over 99 per cent by deploying the best of maintenance and operation practices.

The Game-Changer IPO

The company is preparing for the launch of the first ever trust for infrastructure investment IPO by a firm that is state owned. This marks a milestone deal for Indian markets for capital and people having knowledge about the matter. This move has come at such a time when our government has set a disinvestment target of Rs 1.75 lakh crore for the financial year of 2022. The InvIT route was proposed by the Centre as an alternative fundraising route for state-run companies to manage funding requirements without having to depend on government support.

InvIT helps retail investors gain a small portion of the income in return. It will be a huge transaction while the magnitude of this IPO will likely be around an amount of Rs 7,700 crore, with a prime component of roughly Rs 4500 crores. The balance will make up the component which is secondary.

The list of investors in PowerGrid InvIT IPO

Strong interest is seen from those seeking stable yield and a grip of pension funds globally, international long only type funds, infra funds which are domestic and leading insurance players, and mutual funds are keen about this offering. The sector of power transmission has been well insulated when it comes to the impacts of Covid-19. The government seeks to unlock the value by monetisation of assets. This InvIT IPO was eagerly awaited as it will help in reducing the debt burdens of the company and will provide capital additionally for fresh expansion plans of the network.

ICICI Securities, Edelweiss Financial Services, Axis Capital, Capital Markets and HSBC Securities are the investing banks working on this InvIT IPO as per the DRHP that is filed with Sebi (Securities and Exchange Board of India). Law firms that serve as legal advisors are J Sagar Associates and Cyril Amarchand Mangaldas.

NHAI (National Highway Authority of India) is one other such state-owned firm that is exploring the option of InvIT IPO for raising funds amounting roughly to Rs 5,000 crore. 

Market view on PowerGrid

As per the details mentioned in a report by the brokerage Sharekhan dated 21st December, 2020, the regulated model of RoE by PowerGrid is resilient. Despite the uncertainty of the current times, PowerGrid shows potential for strong earnings which would be 19 per cent profit after tax (PAT) compound annual growth rate (CAGR) over financial year 21-financial year 23 and return on equity of 19 per cent. Unlike companies working in thermal power, PowerGrid does not have an ESG (Environmental Social and Governance) overhang.

Potential monetisation of five Tariff-Based Competitive Bidding (TBCB) assets which are worth Rs 7,164 crore with outstanding dues normalised from discoms are the key catalysts in the near term. The outstanding dues remain at Rs 6,477 crore for the month of September 2020. Likely proceeds coming from InvIT would provide room for higher dividends. Our country’s aim of expanding the capacity for renewable energy to ~445 GW as opposed to 87GW in the financial year 2020 would entail capital expenditure amounting to Rs 2.86 lakh crore within a decade towards transmission lines. This will provide a growth opportunity for PowerGrid of 8-9 per cent per year.