The first ever PSU to launch landmark InvIT IPO

Powergrid Corporation of India Limited is a public sector enterprise under the government of India. Powergrid is a schedule ‘A’ ‘Maharatna’ incorporated in 1989 under the 1956 Companies Act. This listed company has 51.34% 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 twenty one countries.

Being among the biggest transmission utilities of 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% 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 which 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 a target set for disinvestment for the financial year of 2022. This amounts to Rs 1.75 lakh crore and is big on betting for IPOs (Initial Public Offerings) by LIC (Life Insurance Corporation), Air India offerings, after being short the last financial year.

An InvIT being a collective scheme for investment, is somewhat like a mutual fund that enables money investment in a direct manner from institutional and individual investors in projects of infrastructure. This helps them gain a small portion from 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 investors

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 Securities Exchange Board of India. Law firms which 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 which is exploring the option of InvIT IPO for raising funds amounting roughly to Rs 5,000 crore. Two  InvITs have been witnessed so far by the private sector. IRB Infra InvIT is backed by the GIC affiliates and infrastructure firm, whereas, IndiGrid InvIT is backed by Sterlite Powergrid Ventures and KKR.

Market view on Powergrid

As per the details mentioned in a report by the brokerage Sharekhan that 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% profit after tax compound annual growth rate over financial year 21-financial year 23 and return on equity of 19%. Unlike companies working in thermal power, Powergrid doesn’t 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 to higher dividends. Our country’s aim of expanding the capacity for renewable energy to ~445 GW as opposed to 87GW in 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 year.