We see tremendous opportunity in the greenfield power transmission space: IndiGrid
- February 24, 2022
India Grid Trust (IndiGrid), India’s first infrastructure investment trust (InvIT) in the power transmission sector, was recently in the news with some major developments like winning its first greenfield TBCB power transmission project and its diversification into renewable energy. In his second interview with T&D India, we have Harsh Shah, Chief Executive Officer, IndiGrid, giving an in-depth account of recent exciting developments at IndiGrid. Shah is very confident that tremendous amount of investment will be made in power transmission, and that IndiGrid will continue to focus on DPU-accretive investments. This, as Shah points out, will groom IndiGrid into the best-yielding investment vehicle in the infrastructure space. An interview by Venugopal Pillai.
IndiGrid, as we appreciate, recently made several acquisitions of operational transmission projects like NER II, Parbati Koldam, etc. Please summarize the portfolio as far as operational power transmission assets go?
IndiGrid, India’s first power transmission yield platform owns 13 operational power transmission projects and 1 under-construction TBCB power transmission project consisting of 40 transmission lines (7,570 ckm) and 11 substations (13,550 MVA) across 17 states and 1 Union territory of India.
In addition to that we have 100-mw portfolio of commissioned solar assets with fixed-tariff PPA. As on December 31, 2021, AUM of IndiGrid stood at Rs.213 billion.
The divestment of the residual equity stake by Sterlite Power Transmission Ltd (SPTL) in the Investment Manager of IndiGrid has been a significant development, as we read it. Please take us through the transaction.
In fact, we do not see it as a significant development as the management team and the governance remains as it was before this development. In 2019 we raised Rs.2,514 crore of capital via preferential issue and in the same transaction we on-boarded KKR and GIC as two of the largest unit holders of IndiGrid and other institutional investors. As per the agreement between KKR and SPTL, KKR was to acquire 74 per cent stake in IIML in tranches. Additionally, SPTL had an option to sell 26 per cent in IIML to KKR. SPTL exercised the option and sold the 26 per cent to KKR in December 2021.
Also read: Sterlite Power Wins Transmission Project In Northeast, In TBCB Mode
Despite this divestment, Sterlite Power, as we understand, will technically continue to be regarded as the sponsor. SPTL will also continue its association with IndiGrid, despite no equity involvement. Please discuss.
Yes, SPTL continues to be the sponsor of IndiGrid as per InvIT guidelines since SPTL formed the trust at the IPO. However, it is the Investment Manager and not the Sponsor who is involved in all decision making with respect to the InvIT.
Considering that SPTL does not own any shares in the Investment Manager, it wouldn’t be involved with respect to any decision making at IndiGrid. Even when SPTL had minority stake, their participation was through one board representation and no direct involvement in IndiGrid.
However, IndiGrid has acquired 10 transmission assets worth over Rs.20,000 crore from SPTL (2 at the time of IPO, 3 post IPO and in 2019 along with the preferential issue, entered into a framework agreement to acquire 6 more assets, of which 5 have been acquired and only 1 is pending to be acquired). SPTL also owns five other transmission projects which are under development.
We believe that this has been a fruitful business association for both IndiGrid and Sterlite Power. We shall continue to engage and evaluate potential association with respect to such acquisitions with Sterlite Pow
How will SPTL be involved in the other associated entities of IndiGrid – the project manager and the trustee?
SPTL is not involved in IndiGrid entities in any manner. Axis Trustee is an independent trustee and SPTL does not own any shares in the IIML – which is the investment manager of IndiGrid. The project manager role for IndiGrid is also performed by one of the subsidiaries of IndiGrid.
We perceive that the acquisition of Kallam Transmission Ltd, a greenfield TBCB project, is indeed a major development for IndiGrid, the TBCB culture and InvITs in general. Tell us about the transmission scheme, and the next steps towards its implementation.
We see tremendous opportunity in greenfield power transmission space, driven by renewable energy and growth in electricity demand and technological changes taking place in the country. There is a sizeable pipeline of approximately Rs.400 billion worth of tenders already notified and projects worth of around Rs.450 billion under National Monetization Pipeline (NMP).
With this robust bid pipeline for the next few years, we are looking at maximizing opportunities for IndiGrid to best play the cycle which would enable us to enhance organic pipeline for the platform by tapping into the sector synergy and capable bidding and execution team. We remain keen on self-bid model subject to size and risk thresholds as per our risk framework. Similarly, we also continue to look for like- minded developers on case-to-case basis to tie up.
The scope of work for Kallam Transmission Ltd includes operation of a 1,000-MVA substation in Kallam region with an interlinking multi circuit transmission line of around 15 km with a line in line out (LILO) of both circuits from the 400kV double circuit Pune-Parli transmission line.
Bidding consortium entities of IndiGrid acquired Kallam SPV from BPC, which was REC, on December 28, 2021 and transmission license and tariff adoption application was made to authorities on January 5, 2022. The project is currently under development with scheduled commissioning in 15-18 months from today, as per the stipulated timelines mentioned in TSA.
“IndiGrid’s Trust Deed enables it to bid for greenfield transmission and renewable projects.”
On a technical note, can we presume that InvITs are automatically qualified to bid for greenfield TBCB power transmission projects, by virtue of them already owing such operational assets?
As per SEBI InvIT regulations, an InvIT cannot own more than 10 per cent of its AUM in under-construction projects. This is the regulatory restriction within which all InvITs need to operate. Second aspect is the Trust Deed and whether the Trust Deed enables that particular InvIT to participate in greenfield projects – transmission or other infrastructure as per the Trust Deed.
Coming to IndiGrid, IndiGrid’s Trust Deed enables it to bid for greenfield transmission and renewable projects, subject to the specific technical and financial qualification criteria as per RfS documents for projects.
Similarly, IndiGrid has the relevant qualification credentials to qualify for greenfield projects on its own. It is on this basis that IndiGrid won Kallam Transmission.
There are abundant opportunities in the TBCB power transmission space, both at the interstate and intrastate level. The recent approval of Green Energy Corridor (Phase II) is a big case in point. How do you view prospects for IndiGrid bidding for more greenfield projects?
Tremendous amount of investment that is likely to take place in the transmission space. It is projected that close to Rs.95,000 crore worth of bids are supposed to be bid out in next 3-5 years. Currently as we stand close to Rs.40,000 crore of these bids are already identified.
Additionally, with the notification of National Monetization Pipeline (NMP) by the government, another Rs.45,000 crore of operational projects will come out for privatization in the next 3-year time frame. So, the idea is to tap into both the markets, subject to InvIT regulations, suitability and alignment with our existing portfolio and ensuring healthy distribution to our unit holders.
On the operational assets front, we continue to focus on acquisition of commissioned power transmission assets including assets that we have tied up under framework agreement with SPTL which is Khargone Transmission Ltd (we have acquired Gurgaon Palwal and NER II assets already). NMP, as mentioned above, we will continue to track and be interested in.
In addition to commissioned power transmission project, to ensure that we have an early entry into some of these bidding that is taking place which then adds to our pipeline, we are participating either directly or with other partners who will complete the projects and acquired by IndiGrid post commissioning. Basis the risk profile and size of project we shall decide to bid project on our own or with other partners.
There is already cap defined in SEBI regulation with respect to maximum greenfield exposure an InvIT may take and within this cap and subject to risk and size threshold of IndiGrid, we will continue to bid for greenfield transmission projects.
“Our plan continues to be to focus on the DPU-accretive acquisition within our risk framework.”
IndiGrid’s diversification from power transmission, into renewable energy, is an interesting development. For a power transmission-centric InvIT like IndiGrid, how would such diversification help the overall portfolio performance?
Our plan continues to be to focus on the distribution per unit (DPU) accretive acquisition within our risk framework of predictability and certainty of cash flows, counter party risk, operational risk and future growth potential. Solar projects with long-term stable cash flows, good quality plants with tier-1 suppliers, long term contracts, strong PPA frameworks, and financially strong and highly creditworthy counterparties such as SECI, NTPC, GUVNL, etc enables IndiGrid to acquire DPU accretive assets to maximize risk adjusted return for IndiGrid unitholders.
Eventually, would development of greenfield renewable assets, through tariff-based solar and wind auctions, be an area of interest?
We will have to assess basis the overall under construction portfolio that we can implement / undertake, subject to the risk return metric we can achieve on this. We have so far not undertaken any under construction evaluation on solar/wind front.
When the TBCB culture for power transmission came into being in early 2011, a large number of EPC contractors participated, aspiring to groom into developers. Now, most of them are seen exiting from their projects. What is your reading of the situation?
In April 2006, Central government through MOP in exercise of the powers under Electricity Act notified the “Tariff Based Competitive Bidding Guidelines for Transmission Service” (TBCB Guidelines”). Around 2009, when the first power transmission project was bid out on a PPP basis, close to 20 bidders were shortlisted, highlighting the interest market players had in the sector.
However, amongst all infrastructure sub-sectors such as roads, renewable power generation, ports airports, etc. power transmission projects can be relatively tricky during execution / construction phase. Primary reason for this is that a greenfield power transmission project requires the successful bidder to undertake the entire lifecycle of development right from ROW to procurement to approvals and clearances. This is unlike other infrastructure sectors, for instance roads, (land acquisition and routing is a key under development stage activity) where full or partial support is provided by government authorities / NHAI for time consuming activities such as land acquisition or consider solar where in solar park offers land and evacuation solution in advance cutting part of the development life cycle challenges.
“Core EPC companies have either gone back to core business of execution or have remained very selective in developing and bidding of new projects.”
Also read: IndiGrid Completes Acquisition Of Kallam Transmission Ltd
Could you elaborate?
Development of greenfield power transmission requires specific skill sets to handle land acquisition, ROW, planning for river crossing, hilly terrains, designing solution for optimum line length and equipment deployment, enabling safety as per the wind zones and designing for system to last a period of 35-40 years. Designing and execution of a transmission system entails great precision, care and topographical alignment even prior to enter bidding for a project. Each project is unique depending on its design requirements for substation (GIS, AIS), line length, tower type, etc Any gap in assessment of these risks may lead to time & cost overrun of projects. Similarly, execution of these projects requires adequate financial capabilities to deal with various project cycle stage including bidding, development, commissioning, and post commissioning.
As with any infrastructure sub sector, in last 12 years we have seen new bidders, who were either pure-play developers or EPC players (turned developers), participate in the sector bids and take up sizeable portfolios. We have observed mostly large developers or EPC players, who have adequate capital allocation and project management capabilities, have been able to sail through the under-development lifecycle stage. The challenge is not the correct cost estimation but to manage various risks associated with an under-development project and bid in a defined risk return framework.
Core EPC companies have either gone back to core business of execution or have remained very selective in developing and bidding of new projects. This is primarily due to the following: (a) overheads associated with project management (b) wide risk ambit during execution phase which ultimately results in EPC inefficiency (c) challenges of capital allocation between EPC and development business or EPC and any other group businesses (d) limited management bandwidth for transmission sector.
Even a few developers who had entered the sector earlier, have stayed put due to either shift in resource allocation to other priorities or internal financial rejig, resulting in a cautious approach towards power transmission portfolio development.
“Going forward, we believe InvITs are one of the best vehicles to channelize investment into infrastructure space.”
Please summarize IndiGrid’s performance in terms of returns to investors. How do you see the growing role of IndiGrid in India’s power sector in the years to come?
Our total returns here comprise of distribution that is already Rs.55 per unit over the last 19 quarters, and the price change of about 58 per cent, which leads to a total return of 114 per cent since the time we invested in June 2017; on an annualized basis, it translates to 18 per cent. This if we compare with pure debt, instruments of G-SEC bond tenure as well as 30-year interest has outperformed and at the same time, if we compare it with pure equity portfolios like NSE, infra index, power utilities or even individual stocks within transmission sectors, you can see that Indi Grid has significantly outperformed. An important metric to also look at into beta which provides what is the volatility that the stock has moving to beat the market and you can see that our beta is the amongst the lowest 0.05, which translates into a very significantly superior risk adjusted return for the investors.
Going forward, we believe InvITs are one of the best vehicles to channelize investment into infrastructure space. No wonder we have two listed InvITs in power transmission space. The macro requirement for transmission is larger than ever given the focus on general network access, focus on renewables and affordability of cheap power across the nation.
India already lags the world in power demand, which with the macro changes in data centers, automobiles, electronics will only drive the demand further up. In fact, there can’t be a better time to be a player in the energy sector. Growth will need energy, and energy access will need better connectivity. IndiGrid has all the requisite resources, a decently leveraged platform (around 56 per cent), experienced team and the execution ability to tap into this macro-opportunity in a big way.
Note to readers: The first interview by T&D India with Harsh Shah was conducted in January 2020. Photographs used in this interview relate to IndiGrid’s power transmission assets.
