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Monetization plans set to take off

Providing a means for asset monetization

* The launch of Power Grid (PWGR)’s InvIT marks the start of monetization plans for its tariff-based competitive (TBCB) projects. The initial InvIT would house five transmission projects (gross block: INR72b). For PWGR, the same accounts for 3% of its total gross block and hence the value accretion is not large. We had valued these five assets at INR36b. Against this, we see a potential realized value of INR53b – INR27b from offer for sale, INR13.7b of a 15% stake in InvIT, and ~INR12b est. value for a 26% stake in SPVs – implying an INR3/sh accretion.

* Nevertheless, the InvIT provides a strong means for recycling as a) incremental orders within the sector are largely on a TBCB basis and b) PWGR has a healthy portfolio of 11 under-construction TBCB assets (cost: INR108b). Additionally, the co. has three other projects operationalized and has recently won five packages under the RE transmission scheme in Rajasthan – thereby leading to a potential monetization pipeline for another INR235b worth of projects.

* Regulated tariff mechanism (RTM) assets, though, continue to be the mainstay for the co. RTM would account for 92% of the co.’s gross block in FY23 (post-InvIT: 94%). These assets are governed by CERC regulations, including RoEs, and are thus subject to changes in the same. Tariffs in the case of TBCB are more predictable and bid out in advance. PWGR noted that it could look at the option of transferring the RTM assets, but this looks unlikely in the near term, with the focus on monetizing its TBCB pipeline.

InvIT – expect initial IRRs at 9%, yield at 11–12%

* The five assets transferred to the InvIT provide a steady stream of cash flow and have been operational for the past 2–4 years – thereby implying another 31–33 years of life under the transmission service agreement (TSA). PWGR would retain a 26% stake in the individual SPVs until the lock-in period (five years from CoD).

* The offer sets the valuation of the InvIT at INR91b, with an issue size of INR77.4b; PWGR holds a 15% stake in the InvIT. Of the total proceeds, INR27b is an offer for sale from PWGR, while INR50b would be used to repay the debt of the SPVs. The InvIT is projected to generate cash flow from operations of INR11–12b p.a. over FY22–24. We believe the InvIT could provide yield of 11–12% in the initial years, with overall IRR of ~9%. However, there remains a robust growth opportunity, with the ability to leverage at the InvIT level and improve IRR – given an INR235b pipeline at the sponsor (PWGR).

See a strong case for higher dividends; Maintain Buy

* PWGR had noted that monetization proceeds from the InvIT would be used for future growth purposes. While the awarding of transmission schemes under renewable integration provides this opportunity, our checks suggest continued challenges have resulted in the awarding being deferred. Accordingly, with a declining order book and capex schedule, we see a strong case for higher dividend in the near term.

* With INR27b upfront cash from the OFS sale, we see this as potentially distributable to shareholders – implying an additional dividend of INR5/sh. This, along with a steady 60–65% payout ratios, would translate to DPS of INR34/sh over the next two years – implying dividend yield of 8%. Furthermore, a) the share of dividend from SPVs of the InvIT, b) a 26% stake sale in the five SPVs, and c) the further transfer of assets to the InvIT provide additional distribution potential. Given a ~7% dividend yield (current) – backed by steady earnings growth (7% CAGR over FY21–23) and RoEs of 18% – PWGR remains attractively valued at 1.4x FY23E P/BV. Maintain Buy, with DCF-based TP of INR255/sh.

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