A Primer to investing in Power INVITs:

Puspendu

In view of our effort to help investors create positions in pro-cyclical assets with strong long term fundamentals (industry as well as company/specific asset/investment vehicle), we have evaluated the option of investing in INVITs from that perspective. INVITs are similar to REITs in their ability to provide ownership in real assets, their constitution & capital structure, distribution of cash flows and tax liability created thereof. However the nature of assets owned by them are very different and so are the drivers of growth and return expectations. 

INVITs(Infrastructure Investment Trusts), as the name suggests, are restricted to ownership of infrastructure assets like roads, power transmission lines etc. Here we are focussed on evaluating INVITs with ownership of power transmission assets. 

The power sector is the backbone of socio-economic progress for the country and India has significant room for multi year growth in power demand and production/transmission/distribution requirement in lieu of that. While, the per capita electricity consumption in India has increased by about 20% from 1,010 kWh in Financial Year 2015 to 1,208 kWh in Financial Year 2020 (Source: CEA Executive Summary on Power Sector, May 2020 (Provisional)), it continues to be significantly lower than the world average per capita consumption, which was more than 3,200 kWh as on March 31, 2018 (Source: National Infrastructure Pipeline: Volume II, Report of the Task Force, Department of Economic Affairs, Ministry of Finance, Government of India (“NIP”))

The dynamics of the power sector is evolving fast, driven by : 

  • Changes in demand patterns(electrification of transportation/mobility, storage requirement and charging infrastructure)
  • Need for connecting Solar and Renewable energy sources to the national grid as they fast approach “Grid Parity” 
  • Dynamic regulatory environment. 

Hence, creation and efficient management of new transmission assets will be an integral function of the power supply chain.

Transmission charges are the only source of revenue for transmission line owners/INVITs. The charges have two components as explained below;

  • Availability-based Transmission Charges – Inter-state power transmission projects(ISTS) are entitled to incentive or liable for penalty if actual availability is higher or lower than the target availability. These ‘availability-based’ transmission charges incentivise transmission service providers to provide the highest possible system availability, which is the time for which the transmission system is available. In case of RTM(Regulated tariff mechanism) projects, the calculation of incentive is carried out as per applicable CERC Regulations and in case of TBCB(Tariff based competitive bidding) projects, the calculation of incentive or penalty, as the case may be, is carried out as per the respective TSA(Transmission service agreement). Also, in the case of lower availability of the transmission system than the target availability, the developer is entitled to recover only the proportionate transmission charges from the beneficiaries. Better operation and maintenance practices, qualified trained manpower and deployment of advanced techniques such as use of helicopters for live line aerial patrolling, hot line maintenance, equipment condition monitoring including dynamic testing and use of thermo-vision scanning may result in higher transmission network availability.
  • Fixed Transmission charges – The transmission charges for ISTS are collected and disbursed to transmission licensees by the CTU(Central transmission utility) as per the CERC Sharing Regulations. The transmission charges comprise a fixed non-escalable charge and may also comprise a variable escalable charge. The escalable charge is escalated based on the escalation rate which is notified by CERC semi-annually. The escalation rate computed by CERC is based on WPI with 45% weight and CPI with 55% weight (Source: CERC Explanation for the notification on Escalation Factors and other parameters for Tariff Based Competitive Bidding for Transmission Service, October 2020). In addition to this, there might be an incentive or penalty payment, as described above. 

The above aspects of the transmission charges leads us to the following key inferences;

  • Efficient management of the transmission assets are vital to revenue maximisation
  • A portion of the charges being linked to inflation makes it a pro-cyclical asset.

We are therefore interested in investing in INVITs that convinces us of the following;

  • Superior asset management capabilities for revenue maximisation
  • Focussed growth strategy for expansion of asset base
  • Ability to raise capital regularly to acquire value accretive assets that can enhance distribution per unit (DPU)
  • Sponsor’s interest in long term growth of the INVIT.

With the above criteria in mind, we evaluated and compared INDIGRID and PowerGrid INVITs. 

INDIGRID has the following points working in its favour;

  • KKR inducted as sponsor in FY 21. Sponsor interest in the growth of the INVIT is critical for long term growth.
  • In-house asset management. IIML majority owned by KKR.
  • Asset management strength-
    • Focus on maintaining > 99.5% availability across portfolio and maximise incentives 
    • Self reliant O&M practices across the portfolio
    • Investment in technology
  • Consistent growth via acquisition of new assets with steady enhancement in EBIDTA and DPU
  • Ownership spread across many assets and geographies
  • Access to strategic investors for capital raise via equity and debt financing

PowerGrid on the other hand has the following highlights;

  • Possibility of future access to more transmission assets from the sponsor(PowerGrid)
  • Geographically concentrated asset ownership​
  • INVIT asset growth is not the core focus of the sponsor
  • No in-house asset management. The investment manager(POWERGRID Unchahar Transmission Limited) has more than 5 years of operational experience and caters to multiple state-owned clients. The privately owned INVIT assets will therefore be among several other assets under its management. 
  • The investment manager has no track record of strategic asset management with focus on acquisition and required ability to raise capital.

In view of the above, we can be more confident of investing in INDIGRID INVIT for long term, as a preferred asset manager in this space. We would like to wait and watch the performance of PowerGrid INVIT for a few more years. However, one may consider PowerGrid INVIT as a tactical allocation for a slightly better carry in near term, based on current prices.

Please find the link to the presentation of INDIGRID attached herewith : https://www.indigrid.co.in/pdf/Investor_Presentation_newmay.pdf

The link to the red herring prospectus of PowerGrid INVIT is also attached here : https://www.sebi.gov.in/filings/invit-public-issues/jan-2021/powergrid-infrastructure-investment-trust_48912.html#

*The above note is for the purpose of awareness only and should not be considered as an investment recommendation