Buy India Grid Trust; target of Rs 110: ICICI Direct

ICICI Directs research report on India Grid Trust

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.

Outlook
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.

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