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IPO Note: India Grid Trust - HDFC Securities -
IPO Note: India Grid Trust - HDFC Securities
HDFC Sec | Published: 18 May, 2017  | Source :

Background & Operations:

India Grid (IndiGrid) is an infrastructure investment trust (“InvIT”) established to own interstate power transmission assets in India. IndiGrid was established on October 21, 2016 byitsSponsor, Sterlite Power Grid Ventures Limited, and is registered with SEBI pursuant to the InvIT Regulations on November 28, 2016 as an infrastructure investment trust under Regulation 3(1) of the InvIT Regulations having registration number IN/InvIT/16-17/0005. Its sponsor is one of the leading independent powertransmission companies operating in theprivate sector, with extensive experience in bidding, designing,financing, constructing and maintaining power transmission projects across India.

The investment objective of IndiGrid is to undertake activities as an infrastructure investment trust in accordance with the provisions of the InvIT Regulations and the Trust Deed. The investment by IndiGrid shall only be in infrastructure special purpose vehicles or infrastructure projects or securities of Indian companies in accordance with the provisions of the InvIT Regulations and the investment strategy. The investments by IndiGrid shall be in compliancewith the provisions of the InvIT Regulations.

IndiGrid is focused on providing stable and sustainable distributions to its Unitholders. It believes that it is well positioned to take advantage of the growth potential of India’s power transmission industry given its financial position, support from sponsor and the robust regulatory framework for power transmission in India.

It believes the infrastructure necessary to transmit and deliver electricity is vital to India’s continued economic advancement given the inter-regional power deficit resulting from a mismatch between power generation and load centers and the demand-supply deficit which is expected to result from India’s projected GDP growth.Its sponsor owns 11 inter-state power transmission projects with a total network of 30 power transmission lines of approximately 7,733 ckm and 9 substations having 13,890 MVA of transformation capacity.

Of the 11 inter-state power transmission projects owned by the Sponsor, IndiGrid will initially acquire two projects with a total network of eight power transmission lines of approximately 1,936 ckms and two substations having 6,000 MVA of transformation capacity across four states. Pursuant to the ROFO Deed, it has a ‘right of first offer’ to acquire eight of the nine remaining projects (the “ROFO Assets”).

Objective of Issue and Utilization of Net Proceeds:

Prior to the Allotment, IndiGrid, acting through its Trustee, proposes to acquire 100% of the issued and paid-upequity share capital of SGL1 (Sterlite Grid 1 Ltd), which, in turn, holds 100% of the issued, subscribed and paid-up equity sharecapital of BDTCL (Bhopal Dhule Transmission Company Limited) and JTCL (Jabalpur Transmission Company Limited), respectively (the “Share Capital”), pursuant to the Securities PurchaseAgreement. The Sponsor presently holds 100% of the equity shareholding of SGL1 and has subscribed to nonconvertible debentures of SGL1. The Sponsor proposes to transfer its equity shareholding in SGL1 and all or a portion ofthe non-convertible debentures of SGL1 to IndiGrid (“Securities Transfer”) pursuant to the Securities PurchaseAgreement, in exchange for Units, prior to Allotment of Units in this Issue in accordance with Regulation 14(1)of the InvIT Regulations.Accordingly, the Sponsor will receive  Units pursuant to the Securities Transfer, as determined in accordancewith the Securities Purchase Agreement. Such aggregate Unitholding of the Sponsor shall amount to at least15% of the post-Issue Units, subject to the conditions specified under the InvIT Regulations.

Of the 11 inter-state power transmission projects owned by the Sponsor, it will initially acquire two projectswith a total network of eight power transmission lines of approximately 1,936 ckms and two substations having6,000 MVA of transformation capacity across four states (the “Initial Portfolio Assets”). Each of the InitialPortfolio Assets has been completed and revenue-generating for more than a year.

These Initial Portfolio Assets were awarded to subsidiaries of its Sponsor under the ‘tariff based competitivebidding’ mechanism (“TBCB”) on a ‘build-own-operate-maintain’ (“BOOM”) basis. The power transmissionprojects earn revenue pursuant to long-term TSAs and tariff orders passed by CERC in accordance with theElectricity Act, 2003 (“Tariff Orders”). These projects receive availability-based tariffs under the TSAs irrespective of the quantum of power transmitted through the line. The tariff for inter-state power transmissionprojects in India, including the Initial Portfolio Assets, is contracted for the period of the TSA, which is up to 35years from the scheduled commission date of the asset, which may be renewed in accordance with the TSA andthe Electricity Act, 2003.Being interstate transmission licensees (ISTS), these projects enjoy robust payment mechanism and low counterparty risk owing to the Point of Connection (POC) mechanism being operated by the Central Transmission Utility i.e. Power Grid Corporation of India Limited (PGCIL).

Upon the Listing of the Units, IndiGrid shall utilize the Issue Proceeds to provide loans to BDTCL andJTCL (“IndiGrid Loans”), through two separate facility agreements, both dated May 5, 2017, entered intobetween the Trustee (on behalf of IndiGrid), the Investment Manager, and each of BDTCL and JTCL,respectively. Among the key terms of the agreement is that the facility will carry interest @13% p.a. payable every six months.

The IndiGrid Loans will be utilized to (i) repay or pre-pay debt availed from banks and financial institutions (including any pre-payment penalty), SGL1 and SGL2; and (ii) repayment of any other long term and short termliabilities, incurred by BDTCL and JTCL.

The Initial Portfolio Assets:

The Initial Portfolio Assets are owned and operated by SGL1’s subsidiaries, JTCL and BDTCL. SGL1, a subsidiary of InGrid’s Sponsor, owns 100% of the shares each of JTCL and BDTCL. Upon completion of the Issue, SGL1 will be owned by IndiGrid.

Competitive Strengths:

  • Stable cash flows from assets with minimal counter party risks

  • Strong Financial Position

  • Ownership and location of assets

  • Strong lineage and support from the Sponsor

  • Rights to the Sponsor’s pipeline of power transmission projects

  • Strong corporate governance and skilled and experienced Investment Manager.

Business Strategy:

  • Focused business model

  • Pursue additional transmission revenue

  • Pursue non-transmission revenues

  • Institute and maintain optimal capital structure

  • Value accretive growth through acquisitions

  • Distribution Policy

Key Drivers of Power Sector Investment:

  • Widening gap between inter-regional powerdemand-supply to drive transmissioncapacity additions

  • Strong government support to drive transmission investments

  • Up gradation of existing lines

  • Strong renewable energy capacity additions to drive transmission capacity

  • Conventional power generation capacity additions to necessitate concomitant transmission capacity

  • Cross border power trading in south Asian countries

ROFO Deed:

Further, in order to manage any potential competition and conflicts of interest that may arise between theSponsor and IndiGrid in relation to any interests in transmission business, the Sponsor has entered into a ROFODeed (the “Deed”) with the Trustee (acting in its capacity as the trustee of IndiGrid) on May 5, 2017. This deed gives a potential to acquire 8more assets from the Sponsor in the coming years. These assets provide apredictable and stable cash flow devoid of price, offtake and execution risks.

Distribution to unitholders:

In accordance with the InvIT Regulations, IndiGrid is required to distribute at least 90% of its net cash available for distribution to its Unitholders once at least every six months in every financial year. It believes its financial position will enable it to offer stable distributions to its Unitholders and finance its growth plans in the coming years.IndiGrid has beengiven a Corporate Credit Rating AAA/Stable by CRISIL, ‘IND AAA’/Stable by India Ratings and “IrAAA”(pronounced as IR triple A) with stable outlook by ICRA.

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