POWERGRID INVESTMENT TRUST Rs 90
Powergrid Investment Trust (PGI) is a listed investment trust sponsored by the PSU Powergrid Ltd. PGI holds 100% stake in one SPV and 74% stake in four other SPV’s. These SPV’s together operate eleven transmission lines with network capacity of approximately 3699 circuit kilometres and three substations with 6630 MVA transformation capacity. The average remaining life of transmission service agreements is more than 28 years as on date.
As mandated by law, PGI distributes at least 90% of the Net Distributable Cash Flow (NDCF) to its unit holders. It paid out a total of Rs 12 in FY24 and has guided for a similar payment in FY25. At PGI’s current market price of around Rs 90 (NAV Rs 85.28), this translates to a mouthwatering 13.3% pre-tax.
Too good to be true? Frankly, yes! The problem is that such high distribution may not continue beyond FY25 since revenues from the above assets are going to fall and maintenance expenses are going to increase leading to lower NDCF available for distribution (Source – Company Conference Call Q4FY24). The only way NDCF increases is if PGI buys more assets and increases its earning sources. However, PGI is not being able to do that because of the following reasons: –
- The main source of assets for PGI in the past has been acquiring completed transmission lines from its sponsor Powergrid Ltd. This was a win-win for both parties. It released funds for Powergrid Ltd to undertake more transmission projects and PGI was able to increase its revenue source. But a couple of years back the government disallowed PSU’s like Powergrid Ltd to ‘sell’ their assets to raise funds. Instead, they have been mandated to ‘discount’ the receivables for this purpose. Hence, PGI is in a fix as far as buying assets from its sponsor is concerned.
- PGI can also buy transmission assets from private companies but these are all under construction and will be available for acquisition only after commissioning and completing mandatory operational history which will take around 12 to 18 months (Source – Company Conference Call Q4FY24).
- Other InvIT’s like Indigrid are also facing a similar shortage of transmission lines but they have started acquiring solar assets to boost their revenue streams. PGI management is not comfortable entering a new sector like solar as they lack the necessary skills to evaluate solar assets (Source – Company Conference Call Q4FY24).
So, is PGI stuck for a couple of years or is there a silver lining somewhere? Well, there are a couple of possibilities.
First is that in Sep 2024, Central government upped the capex target for power transmission to $110 billion of which a substantial portion may be executed by Powergrid Ltd. Such a large funding requirement may initiate a rethink in policy and the government may allow Powergrid Ltd to sell transmission assets. If this happens, PGI will be a major beneficiary.
Secondly, PGI is directly talking to a few State Governments for buying their interstate transmission lines and the proposal is awaiting cabinet approval.
How does all the above stack up?
The way things stand today, PGI has guided to maintain distribution of Rs 12 in FY25 which will yield @ 13% pre-tax returns. In FY26 the payout will reduce. Though the quantum of fall is not known, assuming 50% drop means @ 6.5% pre-tax payout. By FY27, it should start bidding for private transmission assets which would lead to slow and steady return to higher payouts. Hence the short term is weak but the medium term could be better, more so if any of the positive risks cited above play out.Debt is generally not a space to take risks. PGI is risky beyond FY25 and only those with high-risk appetite should consider it, that too with proper position sizing.