Anzen India Energy Yield Plus Trust Management Discussions

Indian Economy Overview

The global economy has remained resilient over the past year, despite monetary tightening, led by growth in the US and emerging market economies. Headline inflation has declined across countries although the descent in core and services inflation has been slow amidst continuing tightness in labour markets. Given the same, central banks in advanced economies have kept policy rates on hold to ensure the aligning of inflation with targets. Sovereign bond yields corrected sharply in November and December 2023 led by expectations of an early reversal in the US monetary policy cycle. Yields have however hardened since the beginning of 2024 due to central bank communication on the pace of monetary policy easing.

In India, real GDP growth in FY2024 is expected at 7.6% as per the estimates by the National Statistical Office. Growth is expected to be driven by strong investment activity and improvement in private consumption. Consumer Price Inflation (CPI) moderated to 5.3% in October 2023-February 2024 from an average of 5.5% in H1FY2024. Core inflation (i.e., CPI excluding food and fuel) has, however, been on a steadily declining path - in February 2024, CPI fell to 3.4% driven by core goods and services components. The Monetary Policy Committee (MPC) kept the policy repo rate unchanged at 6.50% at its meeting in April 2024.

In the Interim Budget 2024-25, the total capex outlay towards infrastructure increased ~11% to ~Rs 11 trillion. Further, the budget extended the sunset date for exemption provided to sovereign wealth funds/pension funds for specified income earned on investments in infrastructure sector to March 31, 2025.

Power Sector Outlook

Electricity demand increased ~6% in FY2024, supported by resilient economic activity. Capacity additions in FY2024 increased 26 GW YoY to ~ 442 GW led by higher addition in the renewable (RE) and thermal segments. Further, the capacity addition is expected to improve to over 30 GW in FY2025 with the increase in renewable energy capacity addition.

Figure 1 : Capacity Addition - Power

Source : CEA, Ministry of Power

Power Transmission Update

The power transmission segment added 14,625 ckm transmission lines (14,203 ckm in FY2023) and 70728 MVA (759025 MVA in FY2023) capacity in FY2024. During the year, 5 power transmission projects were commissioned with another 30 projects under active bidding by central nodal agencies. Project awards are expected to scale up in the medium term given the strong focus on augmenting evacuation infrastructure for the renewable energy capacity that is expected to be added over the next few years. Investments in tariff based competitively bid projects are expected to increase to Rs 272 bn in FY2025 as compared to Rs 130 bn in FY2024. Over the years, collection efficiency for inter state transmission projects has been healthy supported by presence of the pooling mechanism with the Central Transmission Utility undertaking the billing and collection mechanism at national level for all inter state transmission licencees.

Renewable Energy Update

Renewable energy tenders reached an all time high in FY2024 at 47 GW as compared to 9 GW bid out in FY2023. Pipeline for FY2025 is expected at 19 GW by central nodal agencies and state discoms. There is a greater focus on firm supply i.e. round the clock tenders, pumped storage etc. Capacity addition is expected at 25 GW in FY2025 as compared to 17-18 GW in FY2024. Solar photovoltaic cell and module prices moderated to 11-12 cents/watt in December 2023 as compared to 27-28 cents/watt in December 2022 - driven by improved supplies across the value chain, moderation in demand from Europe and restriction on Chinese imports by the US. Solar and wind tariffs continue to remain competitive as compared to the cost of generation from conventional power.

Sector Outlook

Investments in the energy sector are projected to grow 2x to Rs 28 trillion over the next 5 years 2024-2029 as compared to the previous 5 year period (2018-2023). Investments are expected to be driven by the growing focus on clean energy in the supply mix and a favourable policy framework. The renewable energy segment is expected to contribute ~50% of the overall sectoral investments followed by transmission and distribution (~30%). The sector is likely to witness large investments in balancing sources like pumped hydro and battery storage to enable effective integration of renewable energy with the grid. The Trust proposes to primarily focus on investments in transmission, solar, wind and hybrid technologies. Given the above initiatives by the government, a number of acquisition opportunities are expected to be available for the Trust going forward.

Anzen Overview

Anzen India Energy Yield Plus Trust ("Anzen Trust" or "Anzen" or "Trust") is an irrevocable trust formed under the provisions of the Indian Trusts Act, 1882, and registered with SEBI as an InvIT on January 18, 2022, under Regulation 3(1) of the InvIT Regulations. Anzen Trusts objective is to invest in a diversified portfolio of energy assets to provide long term predictable yield & growth to investors. Anzen is managed by Edelweiss Real Assets Managers Limited ("ERAML"), part of Edelweiss Alternatives business. Edelweiss Alternatives is one of Indias leading alternative asset managers with an AUM of ~US$ 6 bn.

Anzen Trust has acquired a 100% stake in 2 power transmission projects with a total network of ~855 ckms and 2 substations with 1400 MVA transformation capacity ("Initial Portfolio Assets"). The Trust has the right of first offer ("ROFO") to acquire 74% shareholding in 12 solar projects aggregating ~813 MWp. A brief overview of the initial portfolio assets of Anzen are outlined below:

Particulars	DMTCL	NRSS
Entity Name	Darbhanga-Motihari Transmission Company Limited	NRSS XXXIB Transmission Limited
Location	Bihar	Punjab & Haryana
Circuit kms	~277	~578
Collection mechanism & counter party	PGCIL Pooling mechanism	PGCIL Pooling mechanism
	LTTC* Bihar State Power Transmission Company Limited & 7 other customers	LTTC UP Power Corporation Limited & 22 other customers
Full Commercial Operations Date	August 10, 2017	March 27, 2017
TSA expiry date	Aug-52	Mar-52
Remaining tenor of TSA	~29 years	~29 years
FY2024 Revenue (Rs mn)	1,411	1,016

*LTTC : Long Term Transmission Customer

Operational and Financial Highlights

The Initial Portfolio Assets have entered into a Project Implementation and Management Agreement ("PIMA") with Sekura Energy Private Limited (Sponsor) in the capacity as Project Manager pursuant to which the Sponsor/Project Manager is responsible for operations, maintenance, and upkeep required for the Initial Portfolio Assets. The Project Manager has adopted comprehensive procedures for asset management and operations and maintenance employing preventive and corrective measures to optimize the long-term performance and overall operational efficiency.

All the Operations and Maintenance (O&M) practices including technical, safety, health and environment, and risk management protocols are aligned to industry practices and validated through independent ISO audits and accreditations under ISO14001 (Environment Management System), ISO45001 (Occupational Health & Safety Management System), ISO27001 (International Standard for Information Security), and ISO55001 (International Standard for Asset Management). The average availability for the Initial Portfolio Assets is outlined below.

Average Availability Initial Portfolio Assets

Financial Review

The summary of financial statements on a Consolidated and Standalone basis of the Trust for the financial year ended March 31, 2024 is outlined below :

Rs in million

	Consolidated	Standalone
Total Income	2,521.10	2,165.75
EBITDA	2,228.18	2,148.60
Profit / (Loss) before tax	(282.19)	1,511.13
Profit/ (Loss) after tax	(297.27)	1,496.05

The total income of the Trust at a consolidated level was Rs 2,521.10 million in FY2024, of which Rs 94.69 million was other income. EBIDTA and PAT for the year stood at Rs 2,228.18 million and Rs (297.27) million. EBIDTA margin on a consolidated basis was ~ 89% with key cost components being repair & maintenance, insurance expenses, and Investment Management fees. The Trust has cumulatively distributed INR 13.46/unit to unitholders since listing (INR 9.8/unit in FY2024).

Valuation Review

As per the requirements of the Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014, as amended ("InvIT Regulations"), Anzen Trust requires to appoint a Registered Valuer who shall perform valuation of the Project Companies once every financial year, as at the end of financial year i.e., as on March 31, of every year. Considering the same, Anzen Trust had appointed Mr. S. Sundararaman bearing IBBI registration number IBBI/RV/06/2018/10238 to perform valuation of DMTCL and NRSS for the financial year ended March 2024.

The full valuation report as received from the Valuer for the year ended March 2024 is available on the website of Anzen Trust. For valuation purposes, the Valuer adopted the Discounted Cash Flow (‘DCF) Method under the Income Approach. The Valuation summary of the Initial Portfolio Assets as of March 31, 2024 is as follows:

	Enterprise Value (Rs million)	Weighted Average Cost of Capital
DMTCL	13,180	8.02%
NRSS	9857	8.07%
Total	23,037	-

Net Asset Value

Pursuant to Regulation 10 of InvIT Regulations, the Net Asset Value ("NAV") of Anzen Trust as on March 31, 2024 is as follows :

A. Statement of Net Assets at Fair Value Standalone (Rs. Million)

	March 31, 2024		March 31, 2023
Particulars	Book Value	Fair Value	Book Value	Fair Value
A. Assets	23,314	24,202	23,356	24,211
B. Liabilities (at book value)	7,464	7,464	7,459	7,459
C . Net Asset Value (A-B)	15,850	16,738	15,898	16,753
D . Number of units	158	158	158	158
E. NAV (C/D)	100.32	105.94	100.62	106.03

B. Statement of Net Assets at Fair Value Consolidated (Rs. Million)

	March 31, 2024		March 31, 2023
Particulars	Book Value	Fair Value	Book Value	Fair Value
A. Assets	20,930	24,261	23,256	24,840
B. Liabilities (at book value)	7,662	7,662	8,147	8,147
C . Net Asset Value (A-B)	13,269	16,600	15,110	16,694
D. Number of units	158	158	158	158
E. NAV (C/D)	83.98	105.06	95.63	105.66

Debt

The consolidated borrowings of Anzen as on March 31, 2024 stood at Rs 7500 million. The Trust issued non convertible debenture in two series as below. The weighted average coupon rate for both tranches is ~8.14%.

Anzen Trust : NCD Issuance

Series	Date of Allotment	Coupon Rate (%)	Redemption Date	Size of Issue (Rs million)
I	1 December 2022	8.01	1 December 2025	4,500
II	1 December 2022	8.34	1 December 2027	3,000
				7,500

Credit Rating

Credit ratings of "CRISIL AAA/Stable" from CRISIL Limited and "IND AAA/Stable" from India Ratings & Research were obtained by the Trust for its listed Non-Convertible Debentures of Rs 7500 million issued during the financial year ended March 2023. As on date, there is no revision in the credit ratings.

Outlook

Anzen Trust will leverage sectoral tailwinds to grow its operations by capitalizing on a value accretive acquisition strategy in the power transmission and renewable energy sector and other assets in the energy sector with similar risk profiles (including, among others, energy storage assets) which provide long-term, regular, and predictable cash flows, demonstrate potential to maintain or enhance returns to Unitholders and the potential for long-term capital growth in accordance with investment objectives.. The Trust will capitalise on its experienced operational and management teams to identify, structure, execute, and integrate acquisitions effectively.

RISK FACTORS BUSINESS RISK

1. Anzen has limited operating and financial history and as a result, investors may not be able to assess its prospects on basis of past records.

2. Anzen may be unable to operate and maintain power transmission projects to achieve the prescribed availability. Our operations are subject to changes to current tariff policies or regulations governing the Central Transmission Utility or load dispatch centers by regulatory authorities. We may be unable to maintain or renew our existing regulatory approvals or obtain any new approvals due to changes to the regulatory environment and the laws, rules, and directives of the Government of India. We may experience loss of tariffs, grid failure, blackouts, and incur significant repair and replacement costs on the occurrence of certain force majeure events. This could impact the financial position of the Trust and its ability to make distributions to unitholders.

3. A significant proportion of revenues is derived from tariffs received from Long Term Transmission Customers ("LTTCs"). Any adverse impact on the business, prospects, financial condition, results of operations or cash flows of the LTTCs could result in the delay or failure to receive payments of transmission charges and impact the financial position of the Trust.

4. Under the Right of First Offer ("ROFO") Agreement, the Trust has the right to acquire the 74% equity shareholding and debt securities of the Sponsor/its affiliates and Edelweiss Infrastructure Yield Plus (EIYP) in 12 companies that operate solar assets generating 813.2 MW of DC power (the "ROFO Assets"). Furthermore, the remaining 26% equity shareholding of each of the ROFO Assets is held by entities of the JV Group in accordance with their respective joint venture agreements, and the ROFO Agreement neither provides the Trust a right to acquire such 26% equity shareholding in the ROFO Assets, nor is the JV Group party to, or in any way is bound by, the ROFO Agreement. The minority shareholder may continue to have certain affirmative votes, which if exercised, may have an adverse impact on the business operations of the Trust.

5. We are highly dependent on Darbhanga-Motihari Transmission Company Limited and NRSS XXXI (B) Transmission Limited ("Portfolio Companies") for revenue and any adverse development in economic, regulatory and political environment may adversely affect our business, financial condition, results of operations, and prospects. We cannot assure that we will be able to successfully undertake future acquisitions of energy projects or efficiently manage the projects we have acquired or may acquire in the future.

6. The tariffs under the Transmission Service Agreements ("TSAs") are largely fixed over the term of the agreement, while operation and maintenance costs may increase due to factors beyond our control, including inflation, compliance costs, adverse weather conditions etc. Significant increase in operations and maintenance costs may reduce our profits and adversely impact our business, prospects, financial condition, results of operations and cash flows.

7. The loans provided by Anzen to Portfolio Companies are subject to certain terms and conditions which the Portfolio Companies may or may not be able to comply with.

8. Our borrowings are secured by all of the loans given to the Portfolio Companies and shareholding of the Portfolio Companies, providing our lenders/ debt security holders with substantial rights over our operations.

9. We may not be able to successfully fund future acquisitions of new projects due to the unavailability of debt or equity financing.

10. Our Sponsor may face competition from other renewable energy firms, funds, InvITs, and developers as it continues to invest and acquire energy projects to grow the business.

11. We are exposed to opposition from local communities and other parties such as through litigation or by other means, which may adversely affect our financial condition, results of operations and cash flows.

12. Our operations are subject to environmental, health and safety laws and regulations. stricter laws and regulations, or stricter interpretation of the existing laws and regulations, may impose new liabilities on the Portfolio Companies, which could materially and adversely affect our business

13. Our ability to make consistent distributions to our Unitholders depends on the continued service of management teams and personnel of the Investment Manager and Project Manager. Our success depends in large part upon the Investment Manager and Project Manager, the management and personnel that they employ, and their ability to attract and retain such persons.

14. Our insurance policies may not provide adequate protection against various risks associated with our operations.

15. We are subject to counterparty default risks. Our Sponsor and Investment Manager have arrangements with a number of third-parties in relation to the Portfolio Companies as well as the ROFO Assets. As a result, we are subject to the risk that the counterparty to one or more of these arrangements will default, either voluntarily or involuntarily, on its performance under the terms of the arrangement.

16. We depend on third-party contractors for certain operations who may violate applicable laws and regulations. If any of our contractors is involved in any material breach of applicable laws and regulations which leads to termination of the relevant contracting agreement and we are unable to identify any substitute, our business operations or planned expansion projects may be adversely affected. Furthermore, our Project Manager may also be liable for the default by contractors on wage payments, or any violation by them of the applicable laws and regulations.

17. Upgrading or renovation work or physical damage to our power transmission projects may disrupt their operations and result in unforeseen costs.

18. Our operations may be affected by strikes, work stoppages or increased wage demands by employees or other disputes with employees.

19. Anzen Trusts rights are subordinated to the rights of creditors, debt holders and other parties specified under Indian law in the event of insolvency or liquidation of any of the portfolio companies.

20. There are risks associated with the expansion of our business. As part of our growth strategy, we may expand our business which may prove more difficult or costly than anticipated.

21. The TSAs, power transmission assets and the transmission licenses of the Portfolio Companies are of limited duration and may not be renewed/ replaced. Our TSAs have a term of 35 years and any renewal is subject to the discretion of the Central Electricity Regulatory Commission ("CERC"). Furthermore, the average remaining term of the TSAs of the Portfolio Companies is approximately 29 years.

22. The Valuation Report, and any underlying reports, are not opinions on the commercial merits of the Anzen Trust or the Portfolio Companies, nor are they opinions, expressed or implied, as to the future trading price of our Units or financial condition upon listing, and the valuation contained therein may not be indicative of the true value of our assets.

23. We do not own the "Anzen" trademark or logo. Our trademark application for "Anzen" mark and the logo, may be rejected and our ability to use the trademark and logo may be impaired.

24. The registered offices of the Investment Manager and Sponsor are not owned by the respective parties. The parties may not be able to renew or extend these agreements at commercially acceptable terms, or at all.

Risks Related to Anzen and its structure

25. Changes in government regulation (particularly in respect of the InvIT Regulations and other taxation legislations) could adversely affect our profitability, prospects, results of operations, cash flows and ability to make distributions to our Unitholders.

26. We depend on the Investment Manager, the Project Manager and the Trustee to manage our business and assets, who may fail to perform satisfactorily. The rights of the Anzen Trust and the rights of the Unitholders to recover claims against the Project Manager, the Investment Manager or the Trustee may be limited.

27. There may be conflicts of interest between the Anzen Trust, the Investment Manager, the Project Manager or the Sponsor. The Sponsor and its affiliates are engaged in the business of infrastructure assets. Furthermore, the Sponsor/ Project Manager also provides consultancy, project management, and operation and maintenance services in the infrastructure industry including for transmission and renewable energy assets of third parties. There can be no assurance that our interests will not conflict with those of the Investment Manager, Sponsor, its subsidiaries and Associates, in relation to matters including but not limited to future acquisitions of power transmission and renewable energy businesses.

28. We have entered into material related party transactions and may continue to do so in the future, which may potentially involve conflict of interests with the Unitholders.

29. Upon completion of the Issue, the Sponsor and its affiliates may be able to exercise significant influence over activities of the Anzen Trust on which Unitholders are entitled to vote. The Sponsors interests may be different from Unitholders.

30. Our Portfolio Companies, the Sponsor (and Project Manager), the Investment Manager and their respective Associates and the Trustee are involved in certain legal proceedings.

31. Parties to the Trust are required to satisfy the eligibility conditions specified under Regulation 4 of the InvIT Regulations on an ongoing basis. We may not be able to ensure such ongoing compliance by the Sponsor, the Investment Manager, the Project Manager and the Trustee, which could result in the cancellation of the registration of the Anzen Trust.

32. We are governed by the provisions of, amongst others, the InvIT Regulations and the Securities Contracts (Regulation) Act, 1956 ("SCRA"), the implementation and interpretation of which, is evolving. The evolving regulatory framework governing infrastructure investment trusts in India may have a material adverse effect on the ability of certain categories of investors to invest in the Units, our business, financial condition and results of operations and our ability to make distributions to the Unitholders.

33. We must maintain certain investment ratios, which may present additional risks to us.

Failure to comply with these conditions may present additional risks to us, including divestment of certain assets, delisting and other penalties, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

34. The Investment Manager is required to comply with certain ongoing reporting and management obligations in relation to the Anzen Trust. There can be no assurance that the Investment Manager will be able to comply with such requirements in a timely manner or at all.

35. The InvIT Regulations allow for sponsors of listed InvITs to be declassified from the status of sponsors subject to certain conditions. There can be no assurance that in the future, our Sponsor, upon fulfilment of the conditions or any other conditions that SEBI prescribes for declassifications of sponsors, will not exercise its ability to declassify itself from the status of our Sponsor.

36. We will depend on certain directors, executive officers and key employees of the Investment Manager, the Project Manager, and such entities may be unable to appoint, retain such personnel or to replace them with similarly qualified personnel, which could have a material adverse effect on the business, financial condition, results of operations and prospects of the Trust.

37. The Consolidated Financial Statements presented in this Annual Report may not be indicative of the Anzen Trusts future financial condition and results of operations.

Anzen Trust has raised debt financing of Rs. 7.5 bn via listed Non Convertible Debentures, the covenants and other terms of which Anzen Trust may or may not be able to comply with.

38. While we currently own only transmission sector projects, in the future we expect to expand our acquisition strategy to include other types of renewable energy projects. To the extent that we expand our operations to include new business segments, our business operations may suffer from a lack of experience, which may materially and adversely affect our business, financial condition, results of operations and cash flows

Risks Related to India

39. Our business is dependent on economic growth in India and financial stability in Indian markets, and any slowdown in the Indian economy or in Indian financial markets could have an adverse effect on our business

40. We are subject to risks associated with outbreaks of diseases or similar pandemics or public health threats, such as the novel coronavirus ("COVID-19"), which could have a material adverse impact on our business and our results of operations and financial conditions.

41. We are exposed to risks associated with the power sector in India.

Risks Related to Ownership of Units

42. The sale or possible sale of a substantial number of units of Anzen Trust by the Sponsor in the public market following the completion of its lock-in requirement as prescribed under the SEBI InvIT Regulations could adversely affect the price of Units Under Indian law, foreign investors are subject to restrictions that limit their ability to transfer or redeem Units, which may adversely impact the trading price of the Units

43. Under Indian law, foreign investors are subject to restrictions that limit their ability to transfer or redeem units, which may adversely impact the trading price of the units Market and economic conditions may affect the market price and demand for the units. There is no assurance that our units will remain listed on the Stock Exchange

44. Any future issuance of units by us may dilute investors unitholding. The sale or possible sale of a substantial number of units by the Sponsor or another significant unitholder could adversely affect the price of the Unit.

45. Anzen Trust may be dissolved, and the proceeds from the dissolution thereof may be less than the amount invested by the Unitholders. It may be difficult for Anzen Trust to dispose of its nonperforming assets

46. Some decisions on matters relating to the management of Anzen Trust are subject to unitholders approvals, which if not obtained, could lead to adverse effects on Anzen Trusts business.

47. Our rights and the rights of the Unitholders to recover claims against the Investment Manager or the Trustee or Project Manager are limited. Information and the other rights of Unitholders under Indian law may differ from such rights available to equity shareholders of an Indian company or under the laws of other jurisdictions. It may not be possible for unitholders to enforce foreign judgements.