Indigrid Infrastructure Trust (540565) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the India Grid Trust Q2 FY '24 Earnings Conference Call hosted by Axis Capital Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Jiten Rushi from Axis Capital Limited. Thank you, and over to you, sir.

Thank you, Seema. Good evening, everyone. On behalf of Axis Capital, I'm pleased to welcome you all for the Q2 and H1 FY '24 Earnings Conference Call of India Grid Trust. We have with us the management team represented by Mr. Harsh Shah, Chief Executive Officer and Whole-Time Director; Mr. Navin Sharma, Chief Financial Officer; Ms. Meghana Pandit, Chief Investment Officer; and Mr. Satish Talmale, Chief Operating Officer. We will begin with the opening remarks from the management followed by interactive Q&A session. Thank you, and over to you, sir.

Thank you, Jiten, and thank you, everyone, for joining on this quarterly call with us today. I'll be referring to the investor presentation that we have circulated to ensure that we are on the same page in terms of references. So I'm on the Slide #3 of the investor presentation. So I reiterate our vision. Our vision is to become the most admired yield vehicle in Asia. And we believe that if we are able to continue to focus on focused business model with long-term contracts and new operating risk, focus on value-accretive growth, deliver predictable distribution and maintain a capital structure, which is optimum, we will be able to achieve what we have set out to achieve. And the next slide is our current portfolio. And as you can see, the portfolio has substantially grown versus last quarter on account of the recent acquisition. So as we stand today, we are approximately INR 27,000 crores assets under management. We are present in 20 states and 1 UT with over 80 revenue-generating elements -- separate revenue-generating elements, which encompasses 8,000 circuit kilometers of lines; 17,550 MVA of substations and a 555-megawatt of AC solar generation, on DC level, we will be over 670 megawatt. Our transmission average tenor effect on the contract is 27 years, where most of our assets are build, own and maintain. There is no transfer. In solar, where almost all contracts are -- used to be 25 year old, but most of them have an operating history of 7 years now. So with the residual tenure of approximately 18 years. On the quarter 2 update, which is on Slide #6. This quarter has been a very, very interesting quarter on multiple fronts. And at one end, we have acquired one of the largest acquisitions of renewable space, which is Virescent, which we acquired for approximately INR 4,000 crores, which almost made our megawatt capacity 5x, and added IndiGrid's AUM in solar took to around 17%. Along with that, we also raised INR 400 crores -- approximately INR 400 crores of Preferential Allotment, where market reputed investors and family offices end up investing sometime in August. So on the growth and capital front, we are doing pretty well. While funding for Virescent on the debt side also, we have -- we have charted a path of one of the longest infrastructure bonds of almost 18-year tenure with one of the marquee investors like IFC on our board, which IFC has become the largest lender to us now. And on growth side, we have made a beginning in the new area of battery energy storage, which we've been speaking about over the last one year. And we have received the first letter of award for 20 megawatt/40 megawatt hour project in Delhi. So overall, a pretty exciting quarter that we have seen over the last few months. In terms of financial performance, our revenue and EBITDA grew approximately 20% and 4% year-on-year, respectively. With EBITDA growing just 4%, considering there were several onetime costs, which we expensed out in the first quarter of acquisition from Virescent. On the -- like onetime integration and other expenses, which is mentioned here. On the collection front, quarter 2, again, surpassed our expectations. We collected approximately 114% in transmission and 127% for solar, which has aided the NDCF substantially. And that is one of the reason that we have increased the guidance for the financial year 2024 to INR 14.10 a unit as well as increased our guidance and run rate by another 3% to INR 3.55 a unit versus INR 3.45 in quarter 1. Important to note that we have increased INR 3.3 to INR 3.45 just 6 months ago. So on a year-on-year basis, this is almost like a 7.5% increase on DPUs that's being delivered. Net debt to AUM, as it stands today 53.5%, which is below the 7% cap. And we will look to raise capital to continue to maintain the headroom for further growth. On the operational front, our average availability remains above par at 99.76%. Solar CUF disaster plan that we had budgeted for. And the issue that we have seen in the NER asset with insulator flashovers have been rectified and the lines are operational now. On the industry update, we see -- I'm sure you guys have seen the latest couple of days of newspaper. The demand generation growth is increasing, and we are pretty bullish about the peak demand as well as number of units consumed is going to continue to rise on a year-on-year basis, which will result into a substantial amount of investment in the sector. One of the key developments on the transmission and solar service sector that we target, the national framework on ESS to encourage adoption and create ecosystem for development of ESS has been pushed. The national electricity plan envisages 74 gigawatt of storage with a capacity of 400-gigawatt hour. And this is completely in line with India's vision to achieve 500 gigawatt of solar for renewable energy capacity. We are considering that storage is in its journey of evolution, where it was -- where solar was 15 years ago. And with incremental investment in and support from the government, we are confident that the cost of that energy storage will continue to come down. Over INR 1,25,000 crores of projects in transmission have been announced, and they are coming for auction over the next 12 to 18 months, and we are preparing ourselves well to see what are the relevant projects and suitable projects for us to acquire and build. Coming to the next slide, on Slide #8, I would invite Satish Talmale, our Chief Operating Officer, to take you through the operating performance of the company.

Hi, everyone. I'm happy to share quarter 2 operational performance for the portfolio. Starting with safety. So we are continuing to perform on our mission of zero harm. So we have no fatality, zero medical treatment cases. We had 1 LTI and 3 sustained minor injury cases reported. On performance, quarterly average availability is at 99.76%. Solar generation, we generated 231 million units at 18.9% CUF, which is higher compared to last year's quarterly performance by 4%, which is shared due to reliability initiatives and some performance improvement initiatives. Insulator flashover issue, we are out of way. Both the lines are charged now and that risk is largely mitigated. On overall reliability for the transmission system, we have trips/line ratio at 0.16 and substation trips/element is at 0.03. This is slightly higher than the last year performance because of the insulator issues. But now we don't anticipate those issues in near future. Of course, the focus on prudent defect management with the reliability centered approach will continue with the adoption of new technologies. A few initiatives like Asset Health Index, which will help us to determine the condition of the critical equipment and the remaining lines, residual lines is something we have kickstarted. Our drone deployment is already getting commenced in our central region at a larger portfolio level. We'll be covering almost 2,000 kilometers under drone surveillance. Solarization project, which is one of the initiatives for saving our auxiliary power consumption across the portfolio, this is also kick started for other substations. Yes, that's it from my side, and I would hand over to Navin for financial performance.

Thank you, Satish. And good evening, everyone. We are on Slide #9. Another good quarter with robust performance as compared to the same quarter previous year. We have recorded a revenue and EBITDA of INR 695 crores and INR 558 crores, respectively, which translates into 20% and 4% Y-o-Y growth. Q2 FY '24 EBITDA includes onetime integration expenses pertaining to Virescent acquisition. NDCF generated for the quarter was INR 309 crores, and Board has approved distribution of INR 3.55 per unit, which is higher by around 3% compared to our guidance, and this translates into DPU growth of 7.5% on a Y-o-Y basis. With this, FY '24 DPU guidance increased to INR 14.1. Coming on to collections for the quarter. It stood at 114% and 127%, respectively, for transmission and solar business. For H1, collection performance is more than 100% for both the businesses. The DSO as of 30 September '23 stands at 67 and 73 days, respectively, for transmission and solar business, which reflects significant improvement in solar business, where DSO was 125 days a year ago and 87 days in last quarter. Coming on to next slide, #10. DPU for the quarter is INR 3.55 per unit. It will be distributed in form of interest, capital repayment and other income, which is INR 2.9, INR 0.63 and INR 0.02, respectively. The outstanding units at the end of the quarter is around INR 73 crores and the gross distribution to all the unitholders at INR 3.55 comes to INR 259.5 crores. Record date for the distribution is November 9, and tentative date by which the unitholder will receive the distribution is November 18. NAV as of September 30 stood at INR 133 per unit. Post this quarter's distribution, IndiGrid would have distributed INR 78.86 per unit with a total distribution of around INR 4,389 crores. On the right-hand side, we showcased that trend of distribution year-on-year basis, which is stable and scalable growth of 4% over the year. We are on track to meet this year's revised guidance on distribution of INR 14.1 per unit. Coming on to next slide, #11, which showcases the waterfall from our EBITDA to the NDCF distribution and generation. At an SPV level, we have a consolidated EBITDA of INR 586 crores. Net of the finance costs, working capital movement, CapEx and taxes at SPV level, NDCF generated SPV comes to around INR 673 crores. The net of the interest level expenses, interest costs and tax we have generated NDCF of INR 309 crores. In this quarter, we have replenished our results by INR 49 crores and closing results stands at INR 303 crores, which is in excess of one quarter's DPU basis current guidance. So that's all from my side. I hand over to Meghana to take the subsequent slides. Over to you, Meghana.

Thanks, Navin. Good evening, everyone. I'm on Slide 12, which showcases our balance sheet overview for this quarter. We continue to remain AAA rated by all the 3 rating agencies. And at the end of this quarter, 30th September, our average cost of debt was about 7.56%. Almost 84% of all the gross borrowings, which stood at about INR 188 billion are of the fixed rate nature, which has been our strategy of ensuring that bulk of the borrowings continue to be on a fixed rate basis. Post the Virescent acquisition and the Preferential Allotment, our net-debt-to-AUM stands at about 63.5%. The cash balance stood at about INR 1,870-odd crores, which comprises about INR 260-odd crores for the Q2 distribution, almost about INR 500 crores for DSRA. INR 400 crores that we raised from the Preferential issue is also included in this cash balance and the NDCF reserves that got created in the quarter is also part of this cash. During the year, during the quarter for the Virescent acquisition, we raised about INR 4,000-odd crores, and that we raised at an incremental cost of about 7.53%, which was lent by marquee vendors such as IFC, which subscribed to 15-year entities. In addition to that, other marquee debt lenders, who were IIFCL, Central Bank, HSBC, SBI, and YES Bank, so on and so forth. So totally at the end of the quarter, our gross borrowings of INR 188 billion can be split into almost 55% of bonds and about 45% of bank loans. Bonds also are subscribed by various categories of investors, including mutual funds, insurance companies, HNIs, similar diversified portfolio on the loan side. The graph that you see at the bottom of the slide showcases the repayment or refinancing schedule. As has been mentioned, we try and ensure a smoothing score in terms of the refinancing that comes up every year and our target is not to increase by more than 10% to 12% of the gross borrowings. FY '25, the refinancing amount of about INR 21.5 billion comprises the INR 12 billion of short-term loan that we took in order to fund the recent acquisitions. Out of that almost INR 400 crores is already repaid, which we had reaped through Presidential Allotment and balance we will do through the impending equity raise that is planned. Moving to Slide 13. We continue to deliver superior risk-adjusted total returns. Total returns comprises of the distribution, which is almost 75% in the end of the quarter without including Q2 distribution and about 38% of price change. On a total return basis, that translates into 113% since the time we got listed, and on an annualized basis, it's converting to 13%, which as you can see compared to pure-play debt bonds as well as compared to pure-play equity indices, we have been providing superior returns. Especially, if you compare it with the beta, which is the measure of the risk, which is at the lowest end. Continuing on Slide #14, which talks of our business outlook for the portfolio strategy, we are focusing on maintaining stable operations and ensuring that we contain -- we continue to provide with sustainable distribution, while looking at value-accretive acquisitions. On the growth side, we are looking to consummate the pipeline deals, which is one of the transmission assets that we plan to acquire from GR Infa Rajgarh Transmission Limited upon its COD, which is expected in Q3. In adding to the greenfield development, commissioning of our post-greenfield project Kallam and the newly won BESS project in Delhi, we continue to focus on that. In addition to that, the significant greenfield opportunities, which are available on the transmission side, we will look at proactively participating, delivering on the increased DPU guidance of INR 14.1 for FY '24. We are also looking at undertaking internal restructuring in order to smoothen the operations and reducing the legal entity from 38 to -- it will be a lower number. Basically, that is a simplification of the corporate structure. Improving balance sheet strength continues to be the focus area, which is considering the market environment, ensuring that we look at optimizing the interest cost and elongate the tenure as much as is possible, when we look at future acquisitions. Similarly, maintain adequate liquidity to address any uncertainties that come about. We are also looking at raising equity capital for which we had taken the unitholders approval to the extent of about INR 1,500-odd crores. On the asset management side, our focus continues to be on maintaining 99.5% availability across all the portfolios and ensuring that we maximize on the incentives, ensure that we improve on the O&M practices across the portfolio, utilize various digital tools in order to assist in analytics and decision making, both on the solar as well as on the transmission side and ensuring world-class EHS and ESG practices. Our industry stewardship again continues, where we proactively participate in the electricity sector, where we can look at capitalizing on the opportunities that come along, both on the greenfield side as well as on the monetization pipeline side. And focusing on increasing awareness and education about IndiGrid per se and InvITs at large also remains an active area for us. Moving to Slide 15, this is a slide that we provide, which showcases how on the back of accretive acquisitions has our DPU being increased and the longevity of the same. If you look at from FY '18 onwards since the time we got listed from INR 11 to INR 14.1 DPU guidance that we have provided in FY '24, on the back of various acquisitions and the acquisitions we have categorized in various colors. The last one being yellow, which is supposed to be recent as well as augmentation pipeline that we have. And how that the longevity and the increase of that can we see given the business plan. I'll take a pause here and maybe we can do a question-answer session for any specific queries.

[Operator Instructions] We take the first question from the line of Mohit Kumar from ICICI Securities.

Congratulations on a very, very good quarter, especially if you are raising the DPU. So my first question is what is the EBITDA of Virescent in the quarter and in the half year? And what is the price value you bought this portfolio?

This is Harsh Shah, Mohit. I think the Virescent, we have not provided a specific Virescent related disclosure, so it won't be fair to disclose. But I can tell you Virescent performance in this quarter has been for 1 month and 5 days. The consolidation of Virescent has happened from 25th of August, the date of acquisition and resolution of the trust. It is subsequent to that, it is taken into consolidation. But -- so it's this month, I can say that's been added. How much exactly, we have not provided the split in the financials. So we may not be able to give that. On the enterprise value of Virescent, depending on when you look at the net of cash, with cash and all that, simply put, we have acquired for approximately INR 3,850 crores, which is [indiscernible] cash plus cash we'll add. So approximately INR 3,850 crores is the enterprise value one can look at.

Understood. My second question is what is the equity requirement and CapEx required for battery storage project, the expected COD and EBITDA if possible, yes, you are looking at?

Again, it's a very small project. I think the top line of that project on an annuity basis around INR 11 crores, and this is going to be for 10 years. And CapEx is I would say in the range of INR 100 crores plus. We are still working on the final CapEx. As you know, the battery price et cetera, as we are closing, that's going to be more than INR 100 crores. And the equity required for that project will be only 30% because 70% of the debt is going to be funded by [indiscernible], one of the leading development organization, who has supported this project from the beginning, and it is kind of required that we borrow from them. So it's the same for all bidders. So approximately INR 30 crores of the equity required.

Sir, last question on the -- there is some -- I think in the Board meeting, you have -- you are looking for big in term structuring with the group of various SPVs, HoldCos held by IndiGrid producing a number of legal entities. Sir, the purpose of this, does it give us any financial benefit?

I would say a little bit of financial benefits. So we are running about more than 35, 40 legal entities. And the whole idea is when you run the 40 legal entities, we have to run it like a normal company, right? Irrespective of that being an SPV that adds compliance costs and transaction costs. So we are trying to minimize that and our goal is to reduce from where we are to approximately 25, 26 legal entities. The main benefit is going to be the simplification of the structure, compliance costs, et cetera. But considering it is even intercompany -- inter IndiGrid group transfer, et cetera, because it is for the first time, we are going to look for even approval of unitholders at the right time when the overall scheme is finalized.

The next question is from the line of [ Yatindra Agarwal ] from SUD Life.

My question is regarding the contraction in EBITDA. So the operating revenue has increased by 20% and EBITDA interest increased at 4%. And we can see that there is a disproportionate increase in employee benefit expenses and investment management fees. So can you explain this?

Yes. So there are 2 costs, which are onetime costs, which are booked on the acquisitions in the expense line item, they are not paid, but they are booked in that. So there are one time costs, for example, for Virescent acquisition closure. There are certain incentives to the management team who we did not continue as well. So those incentives were paid by the acquirer and therefore reduced some of the equity value. So those reflect in the first month. Second is, the 0.5% is the incentive fee for the [ IM ], which is not paid right now, it is only booked. It will be paid only when our entire year's guidance is met. These are the 2 large expenditure, which are onetime expenditures and acquisition, and therefore, we did that look smaller for the comparable quarter. The third one is, contribution of Virescent was only for 1 month and that's also for the revenue, but that's the reason why the EBITDA is less.

The next question is from the line of Sarvesh Gupta from Maximal Capital.

Congratulations for a good set of numbers. So first question is that earlier we were guiding for a 3% to 5% sort of a DPU growth range in the long term. And I think post '21, we have delivered on the more than 5% now and we are finding more traction outside of our usual transmission assets. So is there a case of increasing these guidance for the DPU, we look at it as well?

I think I would say even 3% to 5% is the intent and strategy, right? It's not a guidance. So it's a strategy. Yes, we have executed this strategy very well over last 5, 6 years and consistently grown the DPU. I think increasing the guidance on growth has not been our focus. Our focus has been to do one. Whenever we increase the guidance, we know that, that guidance is rock solid, and it's going to remain for next 8, 10 years and not just enough for 1, 2 years. And the second is that focus on accretive acquisitions is allowing us to do repeat the guidance, right? Repeat the growth of 3% to 5%. Now I won't put all the extra growth on us still. It is a matter of luck and opportunity, giving opportunities in the market. So, yes we have prepared ourselves well to take over larger assets and interesting assets as in when they come for acquisition. If we can continue to do so repeatedly, why not? You will see this DPU growth being much higher than what we have before. But I would not guide for it that now IndiGrid is always going to grow DPU by 8% and because it gets compounded, right? As you can see in the last sheet that Meghana shared, when we started, we were INR 11, now we are INR 14, and we are seeing that with a 3% to 5%, we will reach INR 15 soon, so it gets compounded. And therefore, I would say expecting that every year, 8% NDCF growth would put us on a little bit of a pedestal, which we have stayed away from so that we can decide with a calmer mind. So I would say that our guidance and growth remains 3% to 5%. As and when there is solid opportunities, there's no incentive for us to hold that growth. So we will increase the DPU as we are doing it right now.

Understood. And can we now for this incremental growth, we are venturing more and more towards solar. So first question related to that was that earlier we were planning to not increase beyond heavier quarter of the total assets. So we are close to that sort of a number as far as these new assets are concerned with this large acquisition. So now incremental growth, how are you finding in your core areas? I mean there's a pipeline mention that you have done in your PPT. But are you seeing interesting opportunities in your incremental growth given that you might be close to the limit that we had sort of talked about in terms of non-core areas?

So we are at 17%. There is still a sizable amount of headroom to grow in non-transmission. But to answer your second question, there is tremendous amount of opportunity in transmission, and we are actively looking at it, actively bidding for it. When we win, what we win, I think, is not in our hands. But I would say we have a significant right to win in these sectors and we are competitive. And it's a large enough pipeline available right now for huge number of players to bid that. So I'm hopeful that we will end up reasonably achieving our share -- a fair share. What number, I don't know, but I would say transmission sector has never seen such a large pipeline to be built out in a year or 2, right? So it's a significant amount of pipeline that we've seen. And we are hoping that we'll win something reasonable for us.

Understood. And just one data point, what is the average tenure on this fixed rate borrowing that we have?

Our weighted average -- weighted average, what's that term called, is about 6.2 years on the entire borrowing.

The next question is from the line of Mr. Milind from Dalal & Broacha.

Just a small question. The drop in NAV between on a year-on-year basis. Is it only because of the capital repayment or there is something else to that?

No, no. It is not at all because of capital repayments. I'll correct you. It has nothing to do with capital repayment. Capital repayment is just an accounting change based on tax rules. It has nothing to do with capital repayment. The NAV reduction has multiple factors that contribute to. One of it is that when you have a fixed life assets, then the value reduces, right? So some of our assets are fixed life assets whose value will reduce. Second is, the risk-free rate has gone up between last -- quarter 2 of last year and quarter 2 of this year, right? So risk-free rate will have a significant impact between the 2 in terms of negative side. On the positive side, we have acquired -- recently we've acquired Khargone Transmission. So that will have an accretive impact. So it's a net impact that we see over there. If there was no acquisition of Virescent and Khargone, the NAV probably would have dropped more. So it's an impact of few negatives, few positives. But it's not capital repayment. Capital repayment is just accounting terminology.

The next question is from the line of [ Vipulkumar Shah ] from Sumangal Investment.

Can you quantify the 2 factors, which you mentioned, which resulted in less than proportionate growth of EBITDA as compared to revenue growth of 20%?

Yes. Navin, do you want to throw some light on that? Because I think it will be in financials also, so you can describe it.

Yes. Yes, Vipul, as we took unitholders' approval for payment of our accrual of acquisition fee, which is 0.5% of -- 0.5% of enterprise value. The amount along with GST is around INR 23 crores. And the incentive which was paid to Virescent employees who have not continued with us is around INR 48 crores.

So net-to-net, it is INR 71 crores, if I understood you correct?

Yes. INR 70-plus crores and there are some other expenses, but broadly, these are 2 line items which have a larger impact. Overall, this cost is in the range of around 2% of total acquisition value.

So roughly INR 80 crores, right, sir? Yes.

Yes, plus/minus a couple of crores.

The next question is from the line of [indiscernible] from Lalkar Securities.

Hello, am I audible?

Yes, you are audible.

Yes. I just needed to confirm whether it is battery -- battery energy storage system, is it operating -- operational?

No, it is not operational. It's to be installed.

Okay, it is to be installed. So is there a change in the strategy to procure nonoperational assets?

We had, of course, under construction asset 2 years ago called Kallam Transmission. So, this maybe allows us to do approximately 10% of our AUM is under construction. We have -- including the Kallam Transmission, we'll be less than 1%. But yes, we have gone to the development part of the business.

The next question is from the line of Mr. [ Ravish Chandra], an individual investor.

Congratulations, Harsh Shah and your team. Excellent one more quarter result. And mainly, we are at INR 27,000 crore of asset. My question is regarding this national monetization plan. We had some change from the government in the newspaper saying that, okay, acquisition cannot be a --[indiscernible] acquisition it has to go on a means or something, then some GST issue has come in between. So any update regarding this?

See, what you are referring to, none of them are formal disclosures from the government. I think you have different statements provided by different management teams in different calls. I think fundamentally, what government has said that any monetization that is happening of the core assets should be in a manner that the assets come back to the government after whatever 20 to 25, 30 years. So that's the in-principle view, which we completely respect and support that the government want to be monetized assets in a way that we are not leasing complete control and eventually, the asset comes back to the country. However, the implementation of this philosophy, we have a differing view. There is not necessarily a GST impact. One can very well house assets in the SPV, sell it, and buy back the shares at zero price after 30 years. That is what happening in the new TBCB projects as well, which are on [indiscernible]. So why shouldn't -- why cannot if not happen in the monetization? So however, I think it's not in our control to comment on that. So we'll wait until the government seeks consultation for that. But there is an AOMT guideline, which talks about how to monetize our transmission assets owned by government and state governments, which we believe addresses many of these aspects. But eventually, the decision to monetize comes back to the respective ministry and respective PSU and I think where people make a different views, so which are -- which may or may not be in line with what the overall objective is.

Okay. Right now, all INR 27,000 crores is our own asset. We are not yet gone into any lease kind of activity till now. So if government goes with that only, we have to go in the future. That's it.

Yes. If they monetize in future, we'll go and acquire those leases. We'll get into that later.

Okay. Maybe cost of acquisition also might [indiscernible] because it's not our property, it is a lease for 35 years or what sort of period?

Correct.

Ladies and gentlemen, that was the last question for the day. I would now like to hand the conference over to the management for closing comments.

Thank you. Thank you, everyone, for joining the call today. And as we have said, we are executing a strategy of focusing on building the business with a good risk return, superior returns, with the least risk. And as you can see, the numbers speak for themselves, and we have been able to deliver that consistently over the last 6.5 years. And we are pretty confident of the quality of assets that we have and quality of management team that we will keep delivering and look forward for your support along the way. Thank you.

On behalf of Axis Capital Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.