Verdict: Attractive for Fixed Return

Rs.7,735 crore IPO: 65% is fresh issue to repay Rs. 4,993 cr debt, 35% OFS by Power Grid

IPO Dates: Thu 29^th April to Mon 3^rd May 2021 (listing on 17^th May)

Price band: Rs. 99-100 per unit (units do not carry face value)

Allocation: 75% for institutional investors, 25% for HNIs and retail combined

Minimum ticket size: Rs.1.1 lakh (1,100 units at Rs. 100 each), no lock-in

Powergrid Infrastructure Investment Trust (PGInvIT) comprises 74% stake in 5 power transmission projects, with 3,699 circuit km and 3 sub-stations of 6,630 MVA transformation capacity, with transmission tariffs linked to availability of transmission and not quantum of power transmitted, reducing risk for unit holders of the trust (similar to shareholders of a company).

Two Components of Return to Unit holders:

PGInvIT can’t be compared to equity, as it is essentially a fixed income product with some capital upside, hence suited for investors looking to allocate investment on the debt side. Important to works out post tax returns, as taxability varies with individuals’ income.

1. Quarterly Yields:

PGInvIT’s estimated yield for FY22E is ~12%, which will decline to 11.6% (FY23E) and 11.2% (FY24E) for current portfolio, due to their tariff structure. Since most SPVs in PGInvIT are under new tax regime, yields will be taxed in the hands of the investor as per individual’s tax liability. Thus, FY22 post-tax yield falls between 6.8-8.2%, inversely related to investor’s taxable income.

For investors earning up to Rs. 2 crore annually, FY22 post tax yield of 7.7% is attractive, not only on an absolute basis, but also on a relative comparison given (i) AAA rating (ii) 10 year G sec yield now at 6.1% (iii) peer IndiGrid InvIT’s 9.8% FY22E pre-tax yield.

2. Capital Appreciation:

Issue is being undertaken at par, as Current NAV is estimated at Rs. 100 per unit (not disclosed in offer document), based on 91 cr post-issue units, whereas IndiGrid is trading at 6% discount to its estimated current NAV of ~Rs. 135. Since PGInvIT’s yield on IPO price is higher than IndiGrid current price, former’s unit price may increase by 10-15% upon listing, bringing down effective yields.

Over the longer term, value of initial portfolio may increase, albeit gradually, as Trust is permitted up to 70% debt, while post-listing leverage is nil. It plans to increase holding in current SPVs from 74% to 100% after Feb 2022, besides acquiring new assets from sponsor Power Grid.

Holding period for long term capital gain on InvIT is 3 years, against 1 year for listed equity. Thus, capital gains on InvIT held for 1-3 years will be taxed at 15%, against 10% for equity shares held for same duration, effectively reducing unit holders’ post-tax return.

Macro View:

While InvITs went off to a slow start, their adoption has improved pursuant to regulatory changes, with IndiGrid on boarding foreign owners and rewarding unit holders well. FY22 budget has clearly spelt out Govt’s intent to monetize income generating assets through InvIT/REIT route, indicating greater future adoption, although present tax structure makes them more suited for institutional investors.  

Conclusion: 

Retail and HNI investors, especially in the lower income bracket, and looking to take fixed income exposure may apply to the issue, as the yields are attractive and scope for listing gain also exists.

Grey Market Premium of Powergrid InvIT: Grey Market Premium of Power Grid InvIT is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.

Disclosure: No interest.