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Please refer to important disclosures at the end of this report

Market Cap Rs27.2bn/US$398mn (YE March 31) FY18 FY19E FY20E FY21E

Bloomberg INDIGRID IN Revenue (Rs bn) 4.5 6.8 12.8 17.8

Shares Outstanding (mn) 283.8 EBITDA (Rs bn) 4.1 6.3 11.7 16.5

52-week Range (Rs) 100/91 EPS (Rs) 7.3 9.1 8.7 9.2

Free Float (%) 79.3 AUM (Rs bn) 53.8 55.3 104.1 141.2

FII (%) 29.2 Distribution/Unit (DPU) 9.6 12.1 13.4 14.0

Absolute Return 3m (%) 5.7 Cash Yield (%) 12.0 12.6 14.0 14.6

Equity Research May 28, 2018 BSE Sensex: 34925

ICICI Securities Limited is the author and distributor of this report

Infrastructure

Target price Rs110

Shareholding pattern Sep ’17

Dec ’17

Mar ’18

Promoters 16.7 20.7 20.7 Institutional investors 58.9 53.3 58.5 MFs, FIs 23.1 22.9 29.3 FIIs 35.8 30.4 29.2 Others 24.4 25.9 20.8

Price chart

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India Grid Trust BUY

Poised for strong growth Rs96Reason for report: Initiating coverage

Research Analysts:

Adhidev Chattopadhyay [email protected] +91 22 6637 7451

Rahul Modi [email protected] +91 22 6637 7373

Apoorva Bahadur [email protected] +91 22 6637 7419

India Grid Trust (Indigrid) is an infrastructure investment trust (“InvIT”) established to own inter-state power transmission assets in India. We initiate coverage on Indigrid with a BUY rating and target price of Rs110 (includes Rs2/unit as residual cash as of March 2018). Our target price is based on discounting the Distribution per Unit (DPU) of cash flows from the InvIT over the residual life of assets post FY18 at a cost of equity of 11% and assumes injection of another 8 assets into Indigrid over FY19-22E through 3 incremental tranches of fund raising funded by a 51:49 mix of equity and debt. Based on incremental dilution at Rs100 for balance 3 tranches of asset additions, we expect the IRR returns of the Indigrid Trust to reach ~12% by FY22E (this assumes Rs100/unit as the initial outgo). Our calculation also assumes inclusion of a terminal value for each asset considering perpetual growth rate of 2%, cost of equity 12%, cost of debt of 8.5% and 50% capital gearing. At current levels, the Trust unit offers an attractive cash yield of 12.6%, 14.0% and 14.6% over FY19-21E, respectively, assuming a 100% pay out of the Net Distributable Cash Flow (NDCF) every year. High cash flow visibility from underlying assets: Unlike other infrastructure asset

classes such as roads, ports and power generation assets, which have a riskier return profile on account of exposure to operational performance of underlying assets, Indigrid’s ownership of power transmission assets, which have long-term fixed tariff contracts, offers high cash flow visibility with minimal risks.

Aggressive growth plan in place: Indigrid is targeting to grow its assets under management (AUM) from Rs55bn as of FY18 to ~Rs300bn by FY22E, of which Rs195bn will be from ROFO assets and the balance through organic/inorganic route. It already has 6 assets under management (including Patran, a third party asset) with another 8 assets planned to be added in 3 tranches over FY19-22E.

IRR returns the ideal metric to assess performance vs. cash yield: Typically, investors may look at the cash yield of the instrument by benchmarking the distribution per unit (DPU) for a given year and dividing it with the prevailing price per unit to arrive at the yield. However, in the case of Indigrid, which has a declining tariff trajectory, unless new assets come into the InvIT, the actual annual DPU may see a decline in the medium term. Hence, we believe that an Internal Rate of Return or IRR, based return on the initial cost per unit, is the correct method to compute returns for benchmarking them to G-Sec yields.

Future asset injections should also be factored in valuations: Depending on the nature of underlying assets, they may or may not have a finite life. Hence, for an investor, who buys an InvIT unit today, the IRR return would be a function of the residual cash flows from the underlying assets which flows to the InvIT. However, an Investment Manager for an InvIT has the option of extending the life of the InvIT by bringing in new assets from time to time, by seeking approval of the existing Unit holders and structuring the funding of such acquisitions through a mix of debt and equity at the InvIT level. Hence, we prefer to look at valuations after factoring in the proposed asset injections.

INDIA

India Grid Trust, May 28, 2018 ICICI Securities

2

TABLE OF CONTENTS

Company Description ...................................................................................................... 3

Valuations ......................................................................................................................... 8

Key Risks ........................................................................................................................ 12

Infrastructure Investment Trusts (InvITs): Overview ................................................. 13

Power transmission sector ........................................................................................... 17

Overview and growth prospects .................................................................................... 17

How India shifted from moving coal to transmitting power ........................................... 19

Green corridors and grid strengthening – renewable capacity addition spree to offer more transmission opportunity ...................................................................................... 20

Tariff-based competitive bidding (TBCB) ...................................................................... 21

Point of Connection (PoC) methodology: Payment security mechanism for inter-state transmission assets ....................................................................................................... 22

Overview of existing and pipeline assets .................................................................... 25

Financial summary (Consolidated) .............................................................................. 28


3

Company Description

India Grid Trust (Indigrid) is an infrastructure investment trust (“InvIT”) established to own power transmission assets in India. Indigrid was established on October 21, 2016 by its Sponsor, Sterlite Power Grid Ventures Limited (SGL), and is registered with SEBI pursuant to the InvIT Regulations.

SGL, the Sponsor of Indigrid, is one of the leading independent power transmission companies operating in the private sector, with extensive experience in bidding, designing, financing, constructing and maintaining power transmission projects across India. As an InvIT, Indigrid is focused on providing stable and sustainable distributions to its unit-holders.

The sponsor owns 10 inter-state power transmission projects with a total network of 29 power transmission lines of ~6,767ckms and seven sub-stations with 12,630MVA transformation capacity. Some of these projects have been fully commissioned, while others are at different stages of development.

Of the 10 inter-state power transmission projects owned by the sponsor, IndiGrid has acquired five projects with total network of 13 power transmission lines of ~3,361ckms and three substations having 7,000MVA of transformation capacity. Pursuant to the ROFO deed, IndiGrid has ‘right of first offer’ to acquire the balance eight projects of the sponsor.

Chart 1: Current Assets owned by Indigrid

• Owns inter-state high voltage power transmission assets

• Fully operational and revenue generating portfolio

• Focused on stable and sustainable distribution to unitholders

• Strong growth pipeline with ROFO on Sponsor assets

* Based on independent valuation report for BDTCL and JTCL as of 30 Sep 2017 and for RTCL, PKTCL, MTL and PTCL as of 30 Jun 2017# Remaining TSA contractual life of 33 years. However, the projects are on BOOM model with perpetual ownership of IndiGrid

~Rs55bn* AUM

3,361 circuit KM7,000 MVA

RTCL

PKTCL

Purlia

Kota

Shujalpur

Yeddumailaram

Mehboobnagar

Mehesshwaram

MTL

Nizamabad

Ranchi

Chaibasa Kharagpur

BDTCL

JTCL

IPAs

ROFO Assetsin jec ted

PTCL

Proposed Investment in theasset of Techno

6 Project SPVs

~33 years of residual contract #

AAA Rated Perpetual Ownership

13 Lines and 3 substat ions

Source: Company


4

Chart 2: Indigrid Trust Management Structure

Sterlite Power Grid VenturesLimited

Public Unitholders

~20.7% ~79.3%

Sterlite Investment Managers LimitedInvestmentmanager

Trustee

JTCL1

SGL1

BDTCL1 RTCL2,4,8 PKTCL2,5,8 MTL2,6,8 PTCL3,7

Sponsor & Project Manager

© INDIGRID

Proposed third party investment (expected to be completed by Q1 FY19)

Note 1: 100% owned. 2: 49% owned. 3: Proposed 46% investment. 4: RTCL - 74% by Mar-18, 100% by Mar-21. 5: PKTCL - 100% by Mar-18. 6: MTL - 74% by Dec-19, 100% by Dec-22. 7: PTCL - 74% by Nov-18, 100% by Nov-21. 8: Balance stake today held by Sponsor entities.

Source: Company

ROFO Assets

Pursuant to the ROFO deed with the Sponsor, IndiGrid has ‘right of first offer’ with respect to eight inter-state power transmission projects, having transmission network of 21 power transmission lines of ~4,831ckms and five sub-stations with 6,630MVA transformation capacity.

Under the ROFO deed or otherwise, potential acquisition of power transmission projects will be assessed for their suitability with IndiGrid’s investment mandate and subject to mutual agreement between the sponsor and the Investment Manager on behalf of IndiGrid as well as approval by unit holders.

Chart 3: Pipeline of Existing Sponsor Assets

ScheduledCOD

Length

Revenues (5 yr. avg.)

2 x 400 kVD/C lines

Commissioned

909 ckms

Rs1,420 mn

East North Interconnection

Ltd(ENICL)

NRSS XXIXTransmission

Ltd (NTL)

3x400 kV D/C lines,

1x400/220 kVD/C GIS sub-

station

Oct 2018

887 ckms

Rs5,030 mn

Gurgaon-Palwal

Transmission Ltd

(GPTL)

5x400kV D/C lines and

3x400/220 kVsubstations

Sep 2019

271 ckms

Rs1,440 mn

Odisha GenerationPhase Transmission Ltd

(OGPTL)

1x765 kV D/C line, 1x400 kV

D/C line

Aug 2019

715 ckms

Rs1,590 mn

Khargone Transmission

Ltd (KTL)

2x765 kV D/C lines, 1x400 kV D/C line

and 1x765/400 kVsubstation

Jul 2019

624 ckms

Rs1,860 mn

NER-IITransmissio

n Limited

2x400 kV D/C lines, 2x132 kV D/C lines

and 2x400/132 kVsubstations

Nov 2020

900 ckms

Rs4,520 mn

Goa TamnarTransmission ProjectLtd.

2x400 kV D/C quad lines,

1x765 kV D/C line, 2x500

MVA, 400/220kV substation

LOIReceivedon Nov 30,

2017

~500 ckms (tentative)

Tariff adoption order awaited

Overview

Source: Company


5

Chart 4: Operational Performance of Assets

BDTCL JTCL

98.0 98.0 98.0 98.0 98.0 98.0 98.0

1.6 1.8 1.9 1.8 2.0 1.9 1.7

FY16 FY17 FY18 Q1FY18 Q2FY18 Q3FY18 Q4FY18

(%)

Normative availability Availability over normative

99.6 99.8 99.9 99.8 100.0 99.799.9

98.0 98.0 98.0 98.0 98.0 98.0 98.0

1.8 1.9 1.8 1.7 1.9 2.0 1.4

FY16 FY17 FY18 Q1FY18 Q2FY18 Q3FY18 Q4FY18

(%)


99.8 99.9 99.8 99.7 99.9 99.4100.0

RTCL PKTCL MTL

98.0 98.0 98.0 98.0 98.0

1.9 2.0 1.8 1.9 1.7

FY18 Q1FY18 Q2FY18 Q3FY18 Q4FY18

(%)


99.9 100.0 99.8 99.9 99.7

98.0 98.0 98.0 98.0 98.0

2.0 1.9 2.0 2.0 1.9

FY18 Q1FY18 Q2FY18 Q3FY18 Q4FY18

(%)


100.0 99.9 100.0 100.0 99.9

98.0 98.0 98.0

2.0 2.0 1.9

FY18 Q3FY18 Q4FY18

(%)


100.0 100.0 99.9

Source: Company

Table 1: Management Overview – Board of Directors Tarun Kataria – Additional Independent Director

Independent Non-Executive Director of Mapletree Logistics Trust Management Almost 30 years of experience in banking and capital markets in New York, Hong Kong, Singapore,

Mumbai MBA in Finance from the Wharton School of the University of Pennsylvania

Kuldip K. Kaura – Additional Non-Executive Director

Rich experience in cement, natural resources and power Previously CEO & MD of ACC, CEO of Vedanta, COO of Vedanta Resource, Managing Director of

ABB India Limited Served as a member of the National Council of Confederation of Indian Industries

Shashikant H. Bhojani – Additional Independent Director

Independent Director on the board of directors of L&T Infrastructure Finance Company Limited Partner at Cyril Amarchand Mangaldas since 2001 28 years of experience with ICICI Limited, starting as Law Officer and reaching Board of Directors

Pratik Agarwal – CEO & Executive Director

MD & CEO of Sterlite Power 10+ years of experience in building core infrastructure businesses in ports, power transmission and

broadband Bachelor’s degree from the Wharton Business School and MBA from the London Business School

Rahul Asthana, IAS – Additional Independent Director

Non Executive Director on the board of directors of Mahindra Vehicles Manufacturing Ltd, Vadhivare Specialty Chemicals , Aegis Logistics, NBS International and Mumbai Metro Rail corp Ltd

Ex Chairman of Mumbai Trust and Maharashtra State Electricity Board Bachelor’s degree from IIT Kanpur and MBA from ICPE University of Ljubljana, Slovenia

Harsh Shah CFO & Executive Director

CFO of Sterlite Power 10+ years of experience in PE Financing, Mergers and Acquisitions, Infrastructure financing ,

regulatory and macro economic policy focused on Infrastructure Bachelor’s degree from the Nirma Institute of Technology and MBA from the National University of

Singapore Source: Company


6

Chart 5: Quarterly DPU

0.92

2.752.89

3.00

Q1 Q2 Q3 Q4

(Rs)

Source: Company, I-Sec research

Chart 6: FY18 Indigrid NDCF Calculation (Rs mn)

4,155

3,438

2,792 2,702

(55) (710)

(160) 67 141 (344) (90) (212)

EB

ITD

A

Non

cas

h in

com

e

Inte

rest

Ext

erna

l deb

t

Tax

Wor

king

cap

ital

ND

CF

at S

PV

s

10%

ND

CF

ret

ain

ed

at S

PV

s

Ext

erna

l Int

pai

d b

yIG

ISR

A

ND

CF

at I

G

FY

18 d

istr

ibut

ion



7

How are power transmission assets better?

Returns from various infrastructure projects like roads, ports and power generation rely mostly on the operational performance of the assets, which in turn is dependent on factors where developers have limited control.

While in the case of ISTS transmission projects, the revenue counter party is a pool of distribution and generation companies, thus reducing the counterparty risk based on account of diversification. Also, in the case of an inter-state transmission asset, the revenue stream is consistent based on the unitary charge (Rs mn/annum) determined at the time of bidding for the entire concession period of 35 years.

These charges are independent of the total power transmitted through the transmission lines and hence factors such as volume and traffic do not fluctuate the revenues.

Moreover, inter-state transmission assets have limited O&M costs as compared to other infrastructure assets. Typically, transmission projects incur relatively low O&M costs of 7-8% of revenues in order to ensure normative availability. In comparison, road projects incur costs as high as 35% - 40% as O&M costs.

In addition, transmission lines could also be used for providing telecom services thereby diversifying the revenue profile. Telecom and data service companies leverage reach of the transmission towers in potential semi-urban and rural regions to offer their services. Thus, other infrastructure projects, over and above the construction risk, also bear the risk of poor returns in case of lower utilization of assets. Transmission projects, on the other hand, are insulated from such risk, thus making it an attractive investment.

Chart 7: Comparison of Transmission Assets with Other Infrastructure Assets

Source: Company


8

Valuations

InvITs are hybrid instruments with fair degree of certainty on cash flows and have the characteristics of both debt and equity instruments. Typically, InvITs pay out returns to investors in the form of interest, dividend or capital return through buybacks, depending on the structure of the InvIT.

IRR returns are the ideal way to value InvITs given nature of cash flows of underlying assets

Typically, investors may look at the cash yield of the instrument by benchmarking the distribution per unit (DPU) for a given year and dividing it with the prevailing price per unit to arrive at the yield. However, in the case of Indigrid, which has a declining tariff trajectory, unless new assets are added into the InvIT, actual annual DPU may see a decline over time. Hence, we believe that an Internal Rate of Return or IRR based return on the initial cost per unit is the correct method to compute returns for benchmarking them to G-Sec yields.

IRR returns should also factor in future asset injections

Depending on the nature of underlying assets, they may or may not have a finite life. Hence, for an investor who buys an InvIT unit today, the investor’s IRR return would be a function of the residual cash flows from the underlying assets which flows to the InvIT. However, an Investment Manager for an InvIT has the option of extending the life of the InvIT by bringing in new assets from time to time, by seeking approval of the existing Unit holders and structuring the funding of such acquisitions through a mix of debt and equity at the InvIT level. Hence, we prefer to look at valuations after factoring in the proposed asset injections by the Indigrid.

Indigrid IRR returns to grow to 12% with 3 incremental tranches of asset addition

From current AUM of Rs55bn (Rs195bn including ROFO assets), Indigrid targets to manage Rs300bn plus AUM over the next five years, resorting to organic as well as inorganic routes. As explained earlier, apart from the existing portfolio of 6 assets (including Patran), Indigrid has a roadmap to inject 8 more assets by FY22E into the InvIT through 3 incremental tranches of asset injection.


9

Chart 8: Indigrid plans to grow AUM to Rs300bn by FY22E

-

50.0

100.0

150.0

200.0

250.0

300.0

350.0

FY18 FY19E FY20E FY21E FY22E

AU

M (

Rs

bn)


Every round/tranche of asset injection would result in higher Net Distributable Cash Flows to shareholders and also boost the DPU and IRR profile of the Indigrid InvIT. Post the first tranche of asset infusion of 4 new assets in FY18 (including Patran), Indigrid has hit the maximum permissible leverage ratio of 49% at the InvIT level. Hence, for any further asset additions in the upcoming tranches, the Trust would have to raise fresh equity, which would lead to dilution. We have assumed every incremental fund-raise at a price of Rs100, based on which we have calculated our IRRs for every tranche of asset injection. For fresh debt at InvIT level, we have assumed an interest rate of 8.5% for each round of debt raising.

Table 2: Indigrid NDCF to grow to Rs12.3bn by FY22E with 3 further tranches of asset injection (Rs bn)

Details FY18 FY19E FY20E FY21E FY22E BDTCL & JTCL 3.4 3.0 3.0 2.7 2.8 Add: Tranche 1 (MTL+PKTCL+RTCL+Patran) - 0.4 0.5 0.5 0.5 Post Tranche 1 3.4 3.4 3.5 3.3 3.3 Add: Tranche 2 (ENICL+NRSS) 3.2 3.5 3.4 Post Tranche 2 3.4 3.4 6.7 6.8 6.7 Add: Tranche 3 (KTL+OGPTL+GPTL) 3.2 3.1 Post Tranche 3 3.4 3.4 6.7 9.9 9.9 Add: Tranche 4 (NER+Goa) 2.4 Post Tranche 4 3.4 3.4 6.7 9.9 12.3

Source: I-Sec research estimates


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Chart 9: Indigrid NDCF to grow to Rs12.3bn

3.4 3.4

6.7

9.9

12.3

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0


ND

CF

(R

s bn

)

Source: Source: I-Sec research estimates

Based on incremental dilution at Rs100 for balance 3 tranches of asset additions, we expect the IRR returns of the Indigrid Trust to reach ~12% by FY22E (this assumed Rs100/unit as the initial outgo). Our calculation also assumes inclusion of a terminal value for each asset considering 2% perpetual growth rate, 12% cost of equity, 8.5% cost of debt, 50:50 gearing. Our IRR does not include any value for residual cash at Indigrid level as of March 2018.

Chart 10: Indigrid IRR to reach 12% by FY22E

8.13%

9.52%

11.47% 11.83% 11.97%

0%

2%

4%

6%

8%

10%

12%

14%


IRR


We value Indigrid with a Target Price of Rs110/share and initiate with a BUY rating

Based on our assumptions of balance 3 rounds of asset injections to be completed by FY22E, we value Indigrid with a target price of Rs110/share, which includes Rs2/share for residual cash at Indigrid, as of March 2018 (FY18 closing cash less DPU payout of Rs3/unit post March 2018). We have assumed a cost of equity of 11% to discount the DPUs over the life of the asset based on incremental DPU post March 2018.


11

Chart 11: Indigrid Distribution per Unit assuming asset injections

9.6

12.1

13.4 14.0

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

FY18 FY19E FY20E FY21E

DP

U (

Rs/

unit)


At current levels, the Trust unit offers an attractive yield of 12.6%, 14.0% and 14.6% over FY19-21E, respectively. We initiate with a BUY rating as the unit offers an absolute return of 15% along with a FY19 DPU of Rs12.1/unit.

Chart 12: Indigrid Cash Yield at CMP of Rs96

12.0 12.6

14.0 14.6

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

FY18 FY19E FY20E FY21E

Cas

h yi

eld

(%)



12

Key Risks

Fluctuations in Interest Rates

As InvITs are hybrid instruments which have features of debt and equity with a long tenure, their returns are often benchmarked to G-Sec yields with expectations of a 200-300bps additional IRR return over G-Secs. As assets held under the InvIT may carry external debt at the SPV level and external debt at the InvIT level as well, any hardening of interest rates may lead to refinancing risk which may lead to fluctuations in the unit price of an InvIT to reflect the increased return expectations of investors. As Indigrid carries external debt at SPV level as well as Invit level, it is exposed to interest rate risks. However, we are of the view that with the addition of new assets into the Indigrid InvIT, the Trust can continue to deliver a 200-300bps IRR return over Indian G-Sec yields.

Incremental capital raising for ROFO assets

Our assumptions for addition of ROFO assets assume all incremental equity capital fund raising at Rs100/share and leverage at the Indigrid Trust level at between 8.35-8.5% for each tranche of incremental asset infusion. However, any variance in the same could lead to a larger than expected dilution at the Trust level, which could change the IRR returns of the instrument.

Dependence on Investment Manager to deliver expected returns

The Investment Manager for the Indigrid Trust is entrusted with the responsibility of delivering the expected returns, management of macro risks and ensuring that incremental asset addition takes place at reasonable valuations. Any failure on the part of the Investment Manager to effectively manage these risks, could alter the expected return at the Trust level.

Risk from asset unavailability

IndiGrid’s assets are entitled to earn revenues by maintaining availability above a certain threshold. In the event of it falling below 95% (due to system breakdown, human error, etc.), the company will under-recover revenues and/or face penalties

Revenue loss from force majeure events

While loss from force majeure events is normally compensated, there could be situations wherein such compensation might not fully offset the loss/damage incurred by the company, thus impacting its financials

Risk of payment delays

Arising out of weak financial position of State Electricity Boards and Power Grid’s conflict of interest as both, the Central Transmission Utility (entrusted with the responsibility of collecting payments) and transmission asset owner (paying itself first, in the event of collection shortfall)

Risk of inability to pass-through cost escalations

While generally, when bidding for transmission assets under the TBCB mechanism, developers factor cost increases, the risk from unexpected increase in cost/aggressive bid assumptions persist, given the fact that such additional costs would not be passed-through


13

Infrastructure Investment Trusts (InvITs): Overview

What are InvITs?

Infrastructure Investment Trusts or InvITs essentially aim to create a pool of assets which throw up a stable stream of cash flows for investors. For infrastructure developers and asset owners, InvITs serve as an effective vehicle to free up capital in existing projects and channel this capital towards creation of new assets.

Infrastructure assets which can be brought into an InvIT include power transmission assets, power generation assets, toll/annuity road assets and ports. Each class of infrastructure assets have their own risk profile in terms of the predictability of cash flows from the underlying assets which makes an InvIT a hybrid product with characteristics of both debt and equity wherein a portion of the returns are fairly certain with possibility of further upsides from better than expected performance of the underlying assets, injection of new assets at a reasonable valuation which can boost overall returns for investors and keeping an efficient capital structure at the InvIT level by the Investment Manager of the InvIT.

Chart 13: Key Objectives for Introducing InvITs

Free Up Current Developer Capital for

Reinvestment into New

Infrastructure Projects

Proposed to Bring Higher Standards

of Governance into Infrastructure Development and

Management

Also acts as a Vehicle to Attract

new Capitalinto Indian

Infrastructure Sector

AdditionalInvestmentAvenue forInvestors

Provide Suitable and

Long-term Financing/

Re-financing for Existing

Infrastructure Projects and

Create Investment

Options

Enable Investors to Hold a

Diversified Portfolio of

Infrastructure Assets

2 53 61 4

Key Objectives

for Introducing InvITs

Source: I-Sec research


14

Chart 14: SEBI (Infrastructure Investment Trust) Regulation, 2014, as amended

Infrastructure as defined

All infrastructure sub-sectors defined by the Cabinet Committee on Infrastructure; vide the Notification of Ministry of Finance dated 1 March 2012 (i.e. under the categories - transport, energy, water sanitation, communication and social and commercial infrastructure)

Registration The InvIT has to be registered with SEBI

Parties in an InvIT Structure & Key Responsibilities

Trustee Sponsor Investment Manager (IM)

Project Manager

Holds the InvIT assets in trust for the benefit of unit holders

Execution of Investment Management Agreement with the IM

Overseeing Investment Manager or Project Manager’s activities as provided

Reviewing of transactions between the Investment Manager and associates

Net worth of at least Rs. 1 Bn in case of body corporate or a company or net intangible assets of Rs 1bn in case of a LLP

Ensuring aggregate minimum post-issue holding of at least 15% (with a three- year lock- in)

Divestment of 15% holding: − Possible only after 3 yrs from the date of listing

Decision-making w.r.t.

investments in assets

Overseeing Project Manager’s activities

Ensuring assets have legally enforceable titles & that material contracts are legally enforceable

Declaring and making distributions to unit holders

Coordinate with Trustee for operations of InvIT

Undertaking the operation, management, maintenance and supervision of assets

Ensuring compliance with the concession agreement

Undertaking all obligation of project implementation in compliance with the terms of the project management agreement

Key investment conditions

Invest at least 80% of the value of the assets in completed and revenue generating infrastructure assets

Balance 20% can be invested in under-construction infrastructure projects and securities of infrastructure companies in India (cannot invest in units of other InvITs)

InvIT should hold (directly or through SPVs) the infrastructure assets for at least 3 years from the date of purchase of the asset by the InvIT (except investment in securities of infrastructure companies)

Investment into SPVs is subject to the InvIT holding a controlling interest (at least 51% of equity share capital) in the SPVs



15

Chart 15: InvIT Regulation – Dividend Policy, leveraging and other aspects

Distribution Policy

At least 90% of distributable cash flow of the SPV shall be distributed to the InvIT in proportion to its holding in the SPV

At least 90% of distributable cash flow of the InvIT shall be distributed to the unit holders

Dividend declared to be paid within 15 days; distributions to the unit holders to be made on a half yearly basis

Leveraging

Borrowings and deferred payments not to be more than 49% of value of InvIT assets (excluding any borrowings made by the InvIT to the SPVs)

Borrowings and deferred payments more than 25% of the value of assets are subject to:

Credit rating; ‒ Approvals of unit holders where the votes cast in favor should be more than the votes

cast against the resolution

Related Party Transactions

Related parties of InvIT shall include (i) parties to the InvIT; (ii) promoters, directors and partners of the persons mentioned in

and as per Companies Act, 2013 and as per Accounting Standards;

Transactions with related parties to be disclosed in the offer document w.r.t. transactions prior & proposed after the offer

The Sponsor will not have voting rights on matters pertaining to related party transactions

Governance

Approval by way of votes cast in favor of the resolution shall be at least 1.5 times the votes cast against for certain cases

Change in Investment Manager or Auditor or Valuer or Trustee ‒ Prior approval of at least 60% of unit holders

‒ Special approval by way of votes cast in favor of the resolution should be at least 1.5 times the votes cast against

Annual report for unit holders within 3 months from the end of the financial year; half-yearly report within 1 month

Price sensitive information to be disclosed to stock exchange


Chart 16: Key rights of Investors and Investment mangager

Rights of Unit Holders

Unit holders shall have right to receive income through distributions from the Trust

With respect to any matter requiring approval of the unitholders

A resolution shall be considered as passed when the votes cast by unit holders in favour of the resolution exceeds those casting against the resolution

For removal of the IM, an approval from the Unitholders shall be required where the votes cast in favour of the resolution shall not be less than one and a half times the votes cast against the resolution

Rights & Responsibilities of Investment Manager

The investment manager shall recommend to the Unitholders investment decisions with respect to underlying assets or projects of the Trust including any further investment or divestment of the assets

The Board of Directors of the investment manager will have at least 50% of the Directors as Independent

The investment manager shall ensure adequate and timely redressal of all unit holders’ grievances pertaining to activities of the Trust

Growth

The Trust may purchase both sponsor and non-sponsor assets as per its investment strategy

Prior approval of the unit holders will be required at the time of any purchase / divestment of assets



16

Chart 17: Tax implications at various levels

SPV

Interest on debt from InvIT Distribution of dividend to

InvIT

SPV InvIT

Dividend income of the InvIT

Tax on other income Gains on disposal of

assets

Unit-holder

Interest income received from InvIT

Dividend income distributed by the InvIT

Capital gains on sale of units

Any other income distributed by the InvIT

No. Entity Issue

1 SPV Interest on loans from InvIT – not subject to witholding tax obligations at SPV level

Distribution of dividend to trust – not subject to DDT if InvIT holds 100% interest in the SPV

2 InvIT Income of trust ‒ Dividend and Interest received by trust from SPV – Tax

Exempt ‒ Capital gains on disposal of assets - taxable in the

hands of InvIT ‒ Any other income – taxable at maximum marginal rate

Interest component of income distributed by trust to the unit holders would attract withholding tax @ 5%/ 10% for non-resident and resident unit holders respectively

3 Unit-holder

Interest income shall be taxable in the hands of Unit Holders as if they have

received the interest directly ‒ At applicable rates for resident unit holders ‒ At 5% for non-resident / offshore investors; benefits

under DTAA, if any, shall be available Dividend Income distributed by the Trust is exempt in the

hands of Unit Holders Sale of listed units of InvIT on the exchange to attract levy

of STT at par with that of listed equity shares Long term capital gains (LTCG), where units held for over

36 months, would be tax exempt and short term capital gains (STCG) would be taxable @ 15% ‒ Where sale of units is off the exchange LTCG taxable

at 20% and STCG @ applicable rates For Non-Resident Unit Holders, benefits under respective

DTAA, if any, shall be available



17

Power transmission sector

Overview and growth prospects

India’s power transmission sector can be segregated into inter-state network (national grid) and intra-state networks (state grids), with inter-state grid’s management, regulation and expansion falling in the domain of central government (and related entities) and that of intra-state grids with respective state and state agencies.

Over the past 5-6 years, inter-state transmission capacity has witnessed robust additions, (with the 13th Five-Year Plan assigning a capex target of Rs1tn to be achieved by FY22) as the government worked towards ensuring robust power evacuation and transmission infrastructure between sprouting power plants and major demand centers. But, intra-state transmission infrastructure development could not keep pace as SEBs struggled with financial constraints.

However, this trend is beginning to correct of late, as UDAY helped improve the financial condition of SEBs, to a certain extent. 13th Five-Year Plan has pegged the intra-state transmission capex target at Rs1.6tn (likely to be increased to Rs2tn over the next five years), potentially providing fillip to the power transmission sector.

Chart 18: Transmission line addition trend

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Source: CEA, I-Sec research


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Chart 19: Substation capacity addition trend

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Table 3: State-wise power transmission capex target under ‘Power for all’ Scheme (Rs bn)

State Transmission

FY18 FY19 Andhra Pradesh 17.0 5.4 Arunachal Pradesh 7.6 10.1 Assam 24.1 14.5 Bihar 25.6 35.5 Chhattisgarh 7.6 NA Delhi 10.3 10.7 Gujarat 27.1 26.7 Haryana 11.2 7.1 Himachal Pradesh 11.8 4.4 Jammu and Kashmir 19.5 7.0 Jharkhand 29.0 30.1 Karnataka 20.0 20.0 Kerala 16.8 1.8 Madhya Pradesh 28.1 29.9 Maharashtra 22.3 24.5 Orissa 13.8 8.8 Punjab 2.6 1.7 Rajasthan 23.9 25.7 Tamil Nadu 37.2 96.4 Telangana 46.3 21.2 Uttar Pradesh 73.1 69.3 Uttarakhand 2.2 2.3 West Bengal 10.3 8.5

487.4 461.6 Source: Ministry of Power, I-Sec research

Table 4: T&D capex – target vs. actual for key states

FY12 FY13 FY14 FY15 FY16 (Rs bn) Target Actual Target Actual Target Actual Target Actual Target Actual Andhra Pradesh 48.5 12.2 57.0 11.4 63.2 13.7 49.5 66.0 21.5 Gujarat 53.2 20.9 72.6 21.6 66.5 25.2 68.0 27w.2 71.4 26.5 Haryana 16.4 6.7 16.0 5.9 20.6 6.2 19.5 6.3 16.5 6.6 Karnataka 21.9 1.3 38.2 9.6 56.5 8.0 47.6 7.7 57.5 12.0 Madhya Pradesh 67.8 4.0 59.9 6.0 65.0 6.3 40.1 6.8 42.0 7.4 Maharashtra 136.2 26.2 155.5 21.8 106.2 14.7 84.7 13.2 79.7 12.3 Punjab 11.1 8.5 38.5 9.8 28.8 7.7 28.7 5.4 21.5 3.6 Rajasthan 66.1 20.8 78.6 22.4 95.2 17.8 94.2 17.1 109.1 24.8 Tamil Nadu 62.4 9.4 50.8 11.4 71.1 30.5 91.8 31.7 99.2 30.2 Telangana 24.8 13.4 74.5 17.3 Uttar Pradesh 68.6 25.8 53.8 17.1 68.2 18.8 69.1 17.9 106.1 32.8 West Bengal 31.4 3.5 35.3 3.4 47.4 4.8 42.4 7.2 47.9 8.8 All India 719.8 167.8 870.3 161.3 845.6 174.3 860.1 177.0 1,022.6 251.0

Source: PFC, I-Sec research


19

Three modes of investment in intra-state transmission projects –

Cost-plus by state transmission companies wherein companies with expertise in transmission system planning and development can act as a consultant while entire investment is made by the state transmission company itself

Forming JVs with the state transcos and jointly making the investments where both earn regulated RoE on the equity invested

Via TBCB route, wherein state agencies auction transmission infrastructure projects to lowest bidder. This model is most relevant to Indi Grid

Demand growth and need for more generation and transmission capacity

As per the revised CEA data, the power requirement for FY22/FY27 is estimated at 1,619MUs / 2,130MUs, implying a CAGR of 6-7% over FY17, which is quite significant as it incorporates the savings resulting from energy efficiency measures. As per the planning authority, peak demand for FY22 is 235GW while peak availability during the same year is expected to be 247.5GW (assuming 100GW of renewables vs the 175GW target; addition of 50GW coal-based power plants currently under construction against 22GW of retiring capacities).

If demand grows by 6-7% annually, per capita demand of electricity is expected to increase to 2,000kWh by 2030 from 1,050kWh currently. Hence, India will require more generating capacities by FY24 for which regular demand monitoring is being done. This will also lead to higher requirement of transmission capacities. Further, more than 40mn families currently do not have electricity connections which are being provided for free under the Saubhagaya scheme. Looking at the railway constraints on coal movement, we expect incremental generating capacity to come up in pithead rather than load centres, for which more inter/intra-state transmission will be needed beyond what is planned till FY24.

How India shifted from moving coal to transmitting power

Chart 20: Improving transmission connectivity making it an attractive proposition over coal transport despite increasing per unit cost

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Source: Power Grid, Ministry of Railways, I-Sec research


20

Chart 21: Power Grid’s infrastructure creation spree – moving the country towards ‘one nation – one price – one frequency’

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Source: Power Grid, I-Sec research

Green corridors and grid strengthening – renewable capacity addition spree to offer more transmission opportunity

India’s massive renewable capacity addition drive required creation of large scale power evacuation infrastructure and investment in grid robustness. For this, the government planned development of ‘Green Energy Corridors’, to ensure creation of power evacuation infrastructure for upcoming renewable capacity. The rationale for creating a separate transmission corridor for renewable generation is as follows:

It helps in managing volatility and intermittency of renewable sources. Developing a separate transmission infrastructure will insulate the main grid from volatilities of renewable power.

Solar projects are generally executed within 15-18 months, outpacing transmission infrastructure creation by 15-20 months. Requirement for speedy execution is also the reason for PGCIL being nominated for execution of the first two phases of Green Energy Corridor project.

Green Energy Corridor project entails the following:

An intra-state transmission strengthening scheme, which would facilitate evacuation of renewable power and integration into the grid

An inter-state transmission strengthening scheme for transfer of renewable power from host state to other states

Last-mile connectivity system for interconnection of renewable energy projects to common pooling stations

Real time measurements/monitoring schemes

Energy storage as a power balancing mechanism to address intermittency

Setting up of Renewable Energy Management centres for facilitation of forecasting the renewable power generation capacity and smooth transmission of the renewable energy management mechanism


21

Tariff-based competitive bidding (TBCB)

Under the TBCB, tariff for projects is not on a cost plus basis and bidders are required to quote tariff for a period of 35 years for establishing transmission lines. The bidder quoting the lowest levelised tariff, is selected. The successful bidder is then required to acquire a special purpose vehicle or SPV incorporated by the bid process coordinator or BPC. Once the process of acquisition is complete, the SPV approaches CERC to obtain a transmission license.

Table 5: TBCB – projects auctioned so far S. No. Transmission Project Winner

1 Transmission system associated with IPPs of Nagapattinam / Cuddalore Area- Package A PGCIL 2 Transmission System associated with IPPs of Vemagiri Area-Package A PGCIL 3 Transmission system for Strengthening in SR for Import of Power from ER PGCIL 4 ATS of Unchahar TPS PGCIL 5 NR System strengthening SchemeNRSS-XXXI(Part-A) PGCIL 6 Transmission System associated with Gadarwara STPS (2x800 MW) of NTPC (Part-A) PGCIL 7 Transmission System associated with Gadarwara STPS (2x800 MW) of NTPC (Part-B) PGCIL 8 Transmission System Strengthening associated with Vindhyachal- V PGCIL 9 Strengthening of Transmission system beyond Vemagiri PGCIL

10 765 kV System Strengthening Scheme in Eastern Region. ERSSXVIII PGCIL 11 System Strengthening Scheme in Eastern Region ERSS XXI PGCIL 12 New WR-NR 765 kV Inter- Regional Corridor PGCIL 13 System strengthening for WR Sterlite Power 14 System strengthening common for WR and NR Sterlite Power 15 Scheme for enabling import of NER/ER surplus by NR Sterlite Power 16 Part ATS for RAPP U-7&8 in Rajasthan Sterlite Power 17 Eastern Region System Strengthening Scheme-VII Sterlite Power

18 Northern Regional System Strengthening Scheme, NRSS-XXIX Sterlite Power

19 Connectivity lines for Maheshwaram 765/400 kV S/S Sterlite Power

20 Common Transmission system for phase-II generation projects in Orissa and immediate evacuation system for OPGC project (Orissa) Sterlite Power

21 Creation of new 400 kV GIS substations in Gurgaon area and Palwal as a part of ISTS Sterlite Power 22 Connectivity system for Khargone TPP (2x660MW) Sterlite Power 23 NER System Strengthening Scheme II Sterlite Power

24 Additional 400kV Feed to Goa and Additional System for Power Evacuation from Generation Projects pooled at Raigarh (Tamnar) Pool Sterlite Power

25 Eastern Region System Strengthening Scheme-VI Essel Infra 26 Northern Region System Strengthening Scheme, NRSS-XXXI (Part-B) Essel Infra

27

Additional inter regional AC link for import into southern region i.e Warora-Warangal and Chilakaluripeta – Hyderabad – Kurnool 765 kV link Essel Infra

28 System strengthening in northern region (NRSS XXXVI) along with LILO of Sikar-Neemrana 400 kV D/C line at Babai(RVPNL) Essel Infra

29 Additional system strengthening for Sipat STPS Adani Transmission 30 Additional system strengthening for Chhattisgarh (B) Adani Transmission 31 System strengthening for IPPs in Chhattisgarh and other generation projects in western region Adani Transmission 32 Immediate evacuation for North Karanpura (3x660MW) generation project of NTPC(ERSS XIX) Adani Transmission 33 Transmission System for Ultra Mega Solar Park in Fatehgarh, Distt. Jaisalmer Rajasthan Adani Transmission

34 Transmission System required for evacuation of power from Kudgi TPS (3x800 MW in Phase-I) of NTPC L&T

35 Transmission System for Patran 400kV S/S Techno Electric

36 Transmission System Associated with Krishnapattnam UMPP- Synchronous interconnection between SR and WR (Part-B) RSTCL

37 Transmission system strengthening in Indian system for transfer of power frem new HEP’s in Butan Kalpataru

38 North Eastern Region Strengthening Scheme (NERSS-VI) Kalpataru

39 Transmission System associated with DGEN TPS (1200 MW) of Torrent Power Instalaciones Inabensa S A Spain

40 System Strengthening in NR Reliance Power 41 Augmentation of Talcher-II transmission System Reliance Power



22

Point of Connection (PoC) methodology: Payment security mechanism for inter-state transmission assets

National Electricity Policy (NEP) of 2005 directed CERC to develop a transmission tariff framework which takes into account quantum, distance and direction of power flow in order to ensure that Designated Inter-state Transmission System Customers (DICs) pay for their utilization of transmission system. This led to CERC introducing CERC (Sharing of Inter State Transmission Charges and Losses), Regulations 2010, which replaced the old Regional Postage Stamp method of appropriation of transmission charges and losses with Point of Connection (PoC) methodology. The new framework is based on the principle of a national integrated transmission grid, where charges and losses will be apportioned on the basis of quantum and location.

Regional Postage Stamp Method (pre-2010 method):

Under this method, transmission charges and losses were pooled at a regional level and all states located within the region shared it in the ratio of power drawn through ISTS.

Total power drawn = Power drawn from central govt. generators (Fixed share + drawings from unallocated quota) + Long-term agreements (PPAs between states and IPPs/other states)

For example: If state A draws 10% power from the regional pool, it will be liable to pay 10% of the total transmission charges for that region.

Why did it need to be replaced?

The Regional Postage Stamp method worked reasonably well when the transmission system lacked national inter-connectivity. However, with the country moving towards complete grid inter-connectivity, need for a utilisation-based transmission charge and loss sharing mechanism became pertinent.

Besides, regional postage stamp method resulted in artificial increase in transmission charges due to ‘pancaking’ (being charged twice – once at each end) because consumer state had to bear transmission charges and losses at both, generation and consumption states.

Point of Connection Method:

This method provides the generator or a consumer with a single, location based transmission charge. The idea is to allow them to decide the location of a power plant by comparing costs of fuel transportation and cost of electricity transmission

For any given location –

If cost of fuel transportation > cost of electricity transmission setup power plant nearer to the fuel source

If cost of electricity transmission > cost of fuel transportation setup power plant closer to the demand node

Assessment of Yearly Transmission Charge:

Yearly Transmission Charge under the PoC framework = PoC Charge + Reliability Support Charge + HVDC Charge + Transmission Losses

PoC Charge for generator = PoC transmission rate of generation zone * Approved injection


23

PoC Charge for consumer = PoC transmission rate of demand zone * Approved withdrawal

It is important to note that PoC charges are billable only to consumers (at the withdrawal node) and power generators having LTA but without PPA

Reliability Support Charge = Reliability support rate * Approved Injection/Withdrawal

where, Reliability support rate = 10% of monthly transmission charges of the ISTS / Total approved Injection and Withdrawal for the region

HVDC Charge = HVDC Charge for the region x Approved Injection/Withdrawal / Total approved Injection and Withdrawal for the region

*this will be for recovery of 90% of MTC, remaining 10% will be recovered via reliability support charges as HVDC help in controlling voltages and power flow in inter-regional lines

Transmission Losses

Determination of Basic Network:

The Regulation requires transmission charges to be limited to transmission network of ISTS Licensees and other Regional Power Committees (RPC) certified licensees whose transmission network is being used for inter-state transmission. In order to define the network for calculation of YTCs, the regulation proposed 400kV to be the upper limit for network truncation as most of PGCIL’s assets operate at 400kV.

Creation of PoC Pool:

In order to calculate Yearly Transmission Charges, annual transmission charge of each approved line is computed based on CERC tariff orders or competitive bids for existing lines and on benchmark capital cost for new lines. Dedicated lines constructed, owned and operated by the generator will not be a part of basic network and hence also not of PoC Pool. Assets below 132kV (except in cases where generator is connected to the grid at 110kV) will not be a part of PoC pool.

YTC of substations will also be apportioned to transmission lines based on the following principles:

Such apportionment will be on the basis of length of associated transmission lines

YTC of sub-station attributed to higher voltage line = 2x YTC of sub-station attributed to lower voltage line

Determination of PoC Charges:

The regulation defines a hybrid methodology to compute Point of Connection charges (in Rs/MW/month) and Loss Allocation Factors that are to be shared among the users of ISTS.

The hybrid method factors both average and marginal utilisation of transmission assets to arrive at the transmission charge. While average charge distributes transmission cost via rule-based allocation, marginal charge accounts for the incremental usage of system due to the addition of a user in the system.

The PoC charges so computed will be determined for peak and non-peak conditions in the following seasonal blocks:

April to June


24

July to September

October to November

December to February

In order to ensure uniformity in transmission charges (per cKm) at each voltage level and conductor configuration, total transmission charge recoverable for a particular voltage level is divided by total length of lines at that voltage level.

Further, the Implementing Agency has to create demand and generation zones of geographically and electrically proximate nodes to aggregate and arrive at a uniform zonal demand and generation charges.

Special cases:

Transmission charges for thermal generators connected directly to ISTS or via pooling stations will be determined at those specific nodes and not clubbed with other generator nodes in the area

For generation stations not a part of ‘Basic Network’, transmission charges will be determined for the region where they are located

No transmission charges or losses will be levied on solar generation over the useful life of plants commissioned till 2014

In case of a delay in commissioning of power plant, generator will be liable to pay ‘withdrawal charges’ corresponding to its Long Term Access from the date such LTA was granted (HCPTC – I case)

Similarly, if there is a demand draw down, the power consumer will have to bear charges as per the demand schedule

Treatment of HVDC lines:

Since HVDC systems are typically set up for bulk, inter-regional transfer of power, the regulation attributes cost of HVDC systems to the Designated ISTS Customers (DICs) of that particular region, in proportion to their approved withdrawal.

Steps for calculating HVDC charges:

Step 1: Connect HVDC lines and calculate transmission charges of AC network for all ISTS beneficiaries

Step 2: Disconnect the HVDC lines and again calculate AC network transmission charges for all beneficiaries

Step 3: Compute the difference between transmission charges at all nodes

The nodes where transmission charges are higher due to the presence of HVDC lines are recognized as 'beneficiaries' of the HVDC system and the YTC of HVDC lines is then proportionately distributed among the identified beneficiaries.

90% of HVDC lines YTC will be recovered by the methodology defined above. The remaining 10% of YTC will be recovered through Reliability Support Charge as HVDC lines improve the overall stability of transmission systems.


25

Overview of existing and pipeline assets

Bhopal Dhule Transmission Company (BDTCL)

Part of High Capacity Power Transmission Corridor (HPTC)-I & V, which has been planned for evacuation of power from Phase-I generation projects in Odisha and system strengthening of WR.

Length (cKm) 944 Project cost (Rs mn) 21,634 CoD Jun'15 Revenue (Rs mn; 5yr avg.) 2,520 TSA date Dec'10 TSA length (years) 35

Source: Company

Jabalpur Transmission Company (JTCL)

Part of High Capacity Power Transmission Corridor (HPTC)-II, which has been planned for strengthening of transmission system required for transfer of power from Generating projects in Jharkhand to NR/WR.

Length (cKm) 992 Project cost (Rs mn) 19,183 CoD Sep'15 Revenue (Rs mn; 5yr avg.) 1,610 TSA date Nov'13 TSA length (years) 35

Source: Company

Maheshwaram Transmission Company (MTL)

In order to increase power supply to southern region, so as to help it meet its present and future requirements.

Length (cKm) 477 Project cost (Rs mn) 5,340 CoD Jun'18 Revenue (Rs mn; 5yr avg.) 560 TSA date Jun'15 TSA length (years) 35

Source: Company

Purulia Kharagpur Transmission Company (PKTCL)

This scheme has been developed for system-strengthening, in order to facilitate exchange of power between West Bengal grid and inter-state transmission system (ISTS).

Length (cKm) 546 Project cost (Rs mn) 3,700 CoD Dec'16 Revenue (Rs mn; 5yr avg.) 725 TSA date Aug'13 TSA length (years) 35

Source: Company


26

RAPP Transmission Company (RTCL)

For evacuation of power from RAPP-5 to 8 (1840 MW), this system has been developed. It will also act as an inter-regional link between northern and western regions.

Length (cKm) 402 Project cost (Rs mn) 3,100 CoD Feb'16 Revenue (Rs mn; 5yr avg.) 440 TSA date Jul'13 TSA length (years) 35

Source: Company

Patran Transmission (Patran)

Length (cKm) NA Project cost (Rs mn) 2,000 CoD Jun'16 Revenue (Rs mn; 5yr avg.) 300 TSA date May'14 TSA length (years) 35

Source: Company

East-North Interconnection (ENICL)

For strengthening of NER-ER transmission corridor, so as to facilitate evacuation and transmission of hydro power generated in north-eastern states to northern states.

Length (cKm) 909 Project cost (Rs mn) 17,000 CoD Nov'14 Revenue (Rs mn; 5yr avg.) 1,420 TSA date Aug'09 TSA length (years) 35

Source: Company

Northern Regional System Strengthening Scheme (NRSS)

This scheme has been proposed in order to mitigate the risk of natural calamities impacting transmission of power from Jammu to Kashmir.

Length (cKm) 832 Project cost (Rs mn) 26,210 CoD (expected) Dec'18 Revenue (Rs mn; 5yr avg.) 5,030 TSA date Jan'14 TSA length (years) 35

Source: Company

Khargone Transmission (KTL)

System for evacuation of power from NTPC’s planned 1,320MW power plant in Khargone.

Length (cKm) 620 Project cost (Rs mn) 21,366 CoD (expected) Jul'19 Revenue (Rs mn; 5yr avg.) 1,860 TSA date Mar'16 TSA length (years) 35

Source: Company


27

Orissa Generation Phase-II Transmission (OGPTL)

This system has been developed in order to help evacuate power from IPPs (7GW+) in Odisha.

Length (cKm) 608 Project cost (Rs mn) 27,360 CoD (expected) May'18 Revenue (Rs mn; 5yr avg.) 1,590 TSA date Nov'15 TSA length (years) 35

Source: Company

Gurgaon PalwalTransmission (GPTL)

This system is being developed to meet projected load growth needs of Gurgaon and Prithala areas.

Length (cKm) 99 Project cost (Rs mn) 17,590 CoD (expected) Mar'19 Revenue (Rs mn; 5yr avg.) 1,440 TSA date Mar'16 TSA length (years) 35

Source: Company

NER System Strengthening Scheme - II (NER)

To strengthen the interconnection between Assam and Arunachal Pradesh and northern and southern parts of the North Eastern region. This system will also facilitate dispersal of power from central sector/private generation projects to various parts of NER.

Length (cKm) 821 Project cost (Rs mn) 24,711 CoD (expected) Nov'20 Revenue (Rs mn; 5yr avg.) 4,520 TSA date Dec'16 TSA length (years) 35

Source: Company

Goa-Tamnar Transmission Project (Goa)

For evacuation of power from projects pooled at Raigarh (Tamnar).

Length (cKm) 500 Project cost (Rs mn) 8,630 CoD (expected) NA Revenue (Rs mn; 5yr avg.) 900 TSA date Jun'17 TSA length (years) 35

Source: Company


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Financial summary (Consolidated)

Table 6: Profit and Loss statement (Rs mn, year ending Mar 31)

Year ending March FY18 FY19E FY20E FY21E Net Sales 4,476 6,822 12,754 17,849 Operating Expenses 399 555 1,018 1,388 EBITDA 4,076 6,266 11,737 16,461 % margins 91.1% 91.9% 92.0% 92.2% Depreciation & Amortisation 1,157 1,542 2,966 4,136 Interest Expenses 1,013 2,131 4,263 5,753 Other Income 129 - - - Recurring PBT 2,036 2,593 4,508 6,572 Less: Taxes (68) - 11 26 PAT before Minority/Associate 2,104 2,593 4,498 6,547 Minority/Assocate share - - - - Net Income (Reported) 2,104 2,593 4,498 6,547

Source: Company data, I-Sec research estiamte


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Annexure: Index of tables and charts

Tables

Table 1: Management Overview – Board of Directors .......................................................... 5 Table 2: Indigrid NDCF to grow to Rs12.3bn by FY22E with 3 further tranches of asset

injection ........................................................................................................................... 9 Table 3: State-wise power transmission capex target under ‘Power for all’ Scheme ......... 18 Table 4: T&D capex – target vs. actual for key states ........................................................ 18 Table 5: TBCB – projects auctioned so far ......................................................................... 21 Table 6: Profit and Loss statement ..................................................................................... 28

Charts

Chart 1: Current Assets owned by Indigrid ........................................................................... 3 Chart 2: Indigrid Trust Management Structure ..................................................................... 4 Chart 3: Pipeline of Existing Sponsor Assets ....................................................................... 4 Chart 4: Operational Performance of Assets ........................................................................ 5 Chart 5: Quarterly DPU ......................................................................................................... 6 Chart 6: FY18 Indigrid NDCF Calculation (Rs mn) ............................................................... 6 Chart 7: Comparison of Transmission Assets with Other Infrastructure Assets ................... 7 Chart 8: Indigrid plans to grow AUM to Rs300bn by FY22E ................................................ 9 Chart 9: Indigrid NDCF to grow to Rs12.3bn ...................................................................... 10 Chart 10: Indigrid IRR to reach 12% by FY22E .................................................................. 10 Chart 11: Indigrid Distribution per Unit assuming asset injections ..................................... 11 Chart 12: Indigrid Cash Yield at CMP of Rs96 ................................................................... 11 Chart 13: Key Objectives for Introducing InvITs ................................................................. 13 Chart 14: SEBI (Infrastructure Investment Trust) Regulation, 2014, as amended ............. 14 Chart 15: InvIT Regulation – Dividend Policy, leveraging and other aspects ..................... 15 Chart 16: Key rights of Investors and Investment mangager ............................................. 15 Chart 17: Tax implications at various levels ....................................................................... 16 Chart 18: Transmission line addition trend ......................................................................... 17 Chart 19: Substation capacity addition trend ...................................................................... 18 Chart 20: Improving transmission connectivity making it an attractive proposition over coal

transport despite increasing per unit cost ..................................................................... 19 Chart 21: Power Grid’s infrastructure creation spree – moving the country towards ‘one

nation – one price – one frequency’ .............................................................................. 20


30

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New I-Sec investment ratings (all ratings based on absolute return; All ratings and target price refers to 12-month performance horizon, unless mentioned otherwise)

BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return

ANALYST CERTIFICATION We /I, Adhidev Chattopadhyay, MBA (Finance); Rahul Modi, Masters in Finance; Apoorva Bahadur, PGDM; Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts are not registered as research analysts by FINRA and are not associated persons of the ICICI Securities Inc. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities Limited is a SEBI registered Research Analyst with SEBI Registration Number – INH000000990. ICICI Securities is a wholly-owned subsidiary of ICICI Bank which is India’s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. (“associates”), the details in respect of which are available on www.icicibank.com.

ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover.

The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances.

This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice.

ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months.

ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction.

ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned in the report in the past twelve months.

ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its associates or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts and their relatives have any material conflict of interest at the time of publication of this report. It is confirmed that Adhidev Chattopadhyay, MBA (Finance); Rahul Modi, Masters in Finance; Apoorva Bahadur, PGDM; Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months.

Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.

ICICI Securities or its subsidiaries collectively or Research Analysts or their relatives do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report.

It is confirmed that Adhidev Chattopadhyay, MBA (Finance); Rahul Modi, Masters in Finance; Apoorva Bahadur, PGDM; Research Analysts do not serve as an officer, director or employee of the companies mentioned in the report.

ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report.

Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report.

We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities.

This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

This report has not been prepared by ICICI Securities, Inc. However, ICICI Securities, Inc. has reviewed the report and, in so far as it includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed.

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