Bogged by high-interest costs and depreciation, IndiGrid's financials are unimpressive. However, this should change if Rs 1,600 crore of IPO proceeds is deployed to reduce debt from Rs 3,452 crore in FY17. Also, as the assets mature and the pool of assets is contributed by those wherein costs of construction is well absorbed due to depreciation, that should also help the numbers look better. However, for now, investors need to take note of operating profit margins at 90.4 per cent in FY17 indicating that efficiency of IndiGrid is at par with the industry. Margins are typically higher due to the very nature of the business, which involves transmission of power from one point to another. Power Grid's margins, too, range between 89-90 per cent.
With an enterprise value of Rs 3,766 crore, the issue at Rs 2,250 crore does not fully absorb the value of assets. This explains why the yield of 10.7 per cent (post tax at 30 per cent slab is 7.5 per cent), based on FY18's projected cash flows of Rs 417 crore, appears low. Investors comparing IndiGrid's return profile with IRB InvIT may be disappointed. However, IndiGrid's revenue streams are nearly risk-free and as SPG operates in a domain which has high entry barriers, the risk profile is unlikely to alter.
But, the biggest risk is any delay in transferring assets from SPG to IndiGrid. IndiGrid will be perpetually dependent on SPG's ability to build its order book. Any delay or slowdown in that may hurt future prospects on IndiGrid. According to the Ministry of Power, only eight out of 30 upcoming interstate transmission projects are likely to be bid under TBCB mode. While in value terms, TBCB pipeline offers comfort (Rs 4,697 crore out of Rs 8,407 crore), the limited pipeline may result in intense bidding.
Who should invest?
InvIT as a product is designed to suit high net worth individuals and institutional investors given the minimum lot size of 10,206 units equivalent to Rs 10,00,000 at lower price band. For these investors, given IndiGrid's credit rating of AAA, those looking for risk-free avenues could treat the issuance like a bond and subscribe to the IPO.