Powergrid Infrastructure Investment Trust Management Discussions

INDIAN ECONOMY OVERVIEW

Indias underlying economic fundamentals are believed to remain strong despite the short-term turbulences caused by the emergence of newer COVID variants, geopolitical crisis, supply-chain disruptions, and rising inflationary pressures. Growth has surpassed the pre-pandemic levels on the back of improved performance in the manufacturing and construction sectors. Indias Gross Domestic Product (GDP) has grown by 8.7% in FY 2021-22 as against a contraction of 6.6% in the previous fiscal. Faced with headwinds from rising inflation, RBI, in its latest estimates, has projected the real GDP growth for FY 2022-23 at 7.2%. The global agencies also peg the Indian economys growth in FY 2022-23 between 7.5% and 7.8%.

The results of growth-enhancing policies and schemes such as production-linked incentives, Atmanirbhar Bharat and increased infrastructure spending are expected to start showing going forward, leading to a stronger multiplier effect on jobs and income, higher productivity, and efficiency - all leading to accelerated economic growth.

Backed by several efforts such as National Infrastructure Pipeline (NIP), technology-enabled development, energy transition, and climate change initiatives taken by the government, the Indian economy is poised to grow at the fastest rate amongst the large nations in the world.

Power Sector in India

Electricity is an essential requirement for all facets of life and has been recognised as a basic human need. It is amongst the most critical components of infrastructure and crucial for socio-economic development and welfare of nations. A thriving power infrastructure is imperative for the sustained growth of the Indian economy. It has been recognised as a strategic and critical sector and the power supply system supports the entire economy and day-to-day life of the citizens of India. Despite consistent increase over the years, the countrys per capital electricity consumption continues to be significantly lower than the world average.

The demand for electricity in the country has, however, been growing rapidly over the past years and the peak demand has grown from 160 GW in FY 2017 to 203 GW in FY 2023. During the first three months of FY 2023, the country has witnessed steep rise in the peak demand which touched a high of 210.79 GW on June 9, 2022.

To meet the growing electricity demand, India has embarked on a focussed energy transition journey and at the COP26 in Glasgow, Honble Prime Minister of India declared Indias commitments to energy transition mainly including achieving the target of Net-Zero emissions by 2070, 500 GW non-fossil fuel energy capacity by 2030 and meeting 50% energy requirement from Renewable Energy (RE) by 2030.

Panchamrits unprecedented contribution of India to climate action

• India will reach its non-fossil energy capacity to 500 GW by 2030

• India will meet 50% of its energy requirements from renewable energy by 2030

• India will reduce the total projected carbon emissions by one billion tonnes from now onwards till 2030

• By 2030, India will reduce the carbon intensity of its economy by less than 45%

• By the year 2070, India will achieve the target of Net-Zero Source: pib.gov.in

The RE capacity which has witnessed significant growth in the past five years contributing largely to the increase in installed capacity in the country, and is poised for a quantum jump by 2030.

Propelled by a growing population, rapid urbanisation, and industrialisation, Governments efforts towards achieving energy access, the demand for electricity is likely to see accelerated growth in the coming years. Further, demand for electricity is also envisaged to increase due to Govt. of Indias thrust on increasing the share of electricity in total energy consumption and efforts towards improving financial and operational performance of the distribution sector.

Power Transmission Sector in India

The transmission sector plays a vital role in the power system value chain linking supply i.e. generation facilities with demand centres and a resilient grid is critical for increasing RE penetration into the grid, and for enabling an unconstrained power market. In India, the transmission system is a two-tier structure comprising intra-state transmission systems (InSTS) and inter-state transmission system (ISTS), with Power Grid Corporation of India Limited, the Trusts Sponsor, being the largest power transmission company in India.

Power Transmission infrastructure in the country has registered strong growth over the past decade, largely driven by growing demand for electricity, capacity additions and enhancing interregional connectivity. During the period FY 2012 to FY 2022, total Transmission Line (220 kV & above) has grown from 257 thousand ckm to 457 thousand ckm and Transformation Capacity (220 kV & above) has grown from 410 GVA to 1,104 GVA. This has led to increase in Inter-Regional Power Transfer Capacity (MW) from 27,150 MW to 1,12,250 MW and increase in total Inter-Regional Power Transfer (BU) from 59 BU to 228 BU during the same period.

The transmission system expansion has led to the creation of a synchronous National Grid, achievement of One Nation-One Grid-One Frequency, and has enabled a vibrant power market in the country.

Rising power demand coupled with Governments focus on addition of RE capacity; increasing cross-border linkages; adoption of new technologies like Battery Storage Systems, Pumped Storage to address RE linked challenges; Govt. schemes to improve distribution sector are driving the growth of power transmission in India.

Govt. of India has recently introduced reforms in power transmission sector aimed at creating a robust transmission infrastructure while also attracting investments in the sector. In this direction, to overhaul the transmission system planning, the recently promulgated new rules, the General Network Access, are directed towards giving power utilities easier access to the transmission network. The rules also require Govt. agencies to prepare an implementation plan for the ISTS every year on a rolling basis, giving visibility to transmission system development. Further, the new standard bidding document finalised by the Govt. of India for competitively bid out transmission projects has reduced the lock-in period for transmission projects, increasing opportunities for faster recycling of capital.

National Infrastructure Pipeline (NIP) and National Monetisation Pipeline (NMP)

The Rs 111 trillion National Infrastructure Pipeline for FY 2020-25 is a one-of-its-kind government initiative to attract investments and provide world-class infrastructure to citizens. The power sector together with renewable accounts for a share of more than 20% of the NIP, and this will provide further impetus to power transmission infrastructure. Further, the NIP envisages a capital investment of Rs 3 trillion in power transmission during FY 2020-25 which includes Rs 1.9 trillion by the States.

NIPs Vision 2025 for Power

24/7 clean and affordable power for all

Total capacity of 583 GW (Renewable 39%)

Reduction in share of Thermal; Increase in Renewable Energy

Renewable share in consumption to increase to 20% per capita consumption 1,616 units

[Promotion of grid storage and offshore wind energy

Reforms in distribution

Electric vehicle charging infrastructure

Source: NIP

The Rolling Plan (2026-27) for ISTS, March 2022, prepared by the CTUIL, estimates significant investments in ISTS between FY2022 and FY2027.

The National Monetisation Pipeline (NMP) formulated by the Government is a crucial initiative targeted at kickstarting investment cycle which will be crucial in funding the infrastructure projects. It envisages monetisation of brownfield revenue earning operational infrastructure assets worth Rs 6 trillion over a four-year period from FY 2020-25, running co-terminus with the NIP. Assets worth Rs 852 billion have been earmarked for monetisation in the power sector, of which Rs 452 billion i.e. more than 50% is envisaged for power transmission through POWERGRID. The NMP lays emphasis on InvITs as one of the modes for asset monetisation of power transmission assets. The government has also introduced several favourable regulatory and taxation norms aimed at making InvITs an attractive investment vehicle in India for global investors.

(Source: National Monetisation Pipeline)

Business Overview

POWERGRID Infrastructure Investment Trust (PGInvIT) is set up by Power Grid Corporation of India Limited (POWERGRID), a Maharatna Central Public Sector Enterprise (CPSE) and Indias largest transmission player, to own, construct, operate, maintain, and invest, as an infrastructure investment trust, in power and power transmission assets in India. It is the first InvIT sponsored by any Government entity in our country

PGInvIT was set up as a Trust under the Indian Trusts Act, 1882 in September 2020 and was registered as an infrastructure investment trust with the Securities and Exchange Board of India (SEBI) in January 2021 under the InvIT Regulations.

The Trust has one of Indias most experienced and reputed Sponsor and Project Manager POWERGRID, an experienced Investment Manager POWERGRID Unchahar Transmission Limited, and Trustee IDBI Trusteeship Services Limited (ITSL). It intends to leverage the expertise and the experience of its Sponsor and the IM to deliver consistent, stable, and visible returns to its Unitholders.

Initial Portfolio Assets

The initial portfolio comprises five fully operational and revenue-generating assets housed in five Special Purpose Vehicles (SPVs) with a sound operational track record and high availability. The SPVs are entitled for assured transmission charges and incentives, subject to maintaining operational parameters, for a period of 35 years from the date of respective commercial operation. The Trust, through its Project Manager, focusses on maintaining and optimising the performance of these assets.

The assets comprising 11 transmission lines aggregating 3,698.59 ckm and 3 substations with an aggregate transformation capacity of 6,630 MVA include grid strengthening links, generation-linked assets, and assets linked with inter-regional power flow covering five states in India. The residual life of the SPVs as per the respective Transmission Service Agreements is more than 30 years.

Please refer to Page 21 of this Report for further details.

Operational Highlights

Efficient Operation and Maintenance plays an important role in the transmission sector, delivering value to various key stakeholders. Maximum availability of transmission assets while ensuring continuous power supply to the customers ensures incentive income, in addition to steady transmission charges, benefiting unitholders.

The operation and maintenance of the IPAs is being carried out by POWERGRID, one of the largest transmission utilities globally. While undertaking routine and breakdown maintenance, the Project Manager also implements various latest techniques to minimise shutdown time for periodic maintenance checks and breakdown maintenance and for better availability of transmission systems. Through the Project Manager, the IPAs ensure compliance with applicable environmental regulations and in providing a safe and healthy working environment to the personnel involved in operation and maintenance, through safety drills, and trainings.

For ensuring safe operations, safety drills including mock drills for fire, snake bite, and use of first-aid are regularly conducted at the SPVs. During FY 2021-22, all the SPVs reported 100% safe man-hours and accident-free operations. Various functional and behavioural trainings were imparted to the personnel associated with the operations and maintenance of the IPAs.

The Emergency Restoration System available with POWERGRID and placed strategically at various locations across India along with related skilled manpower can be deployed for uninterrupted operations and quick restoration of transmission services, in case of exigencies.

Undertaking value accretive acquisitions

PGInvIT aims to provide stable, consistent, and visible returns to its unitholders and acquisition of assets are an important means to achieve that. During the year, the Trust acquired the balance 26% equity shareholding in PVTL for a consideration of Rs 3,307.85 million following the completion of its lock-in period of five years of operations. Further, following the approval by Honble CERC and prudence check by LTTC, the Trust through its SPVs acquired rights for additional revenues accruing to three of its SPVs viz., PPTL, PWTL & PJTL for an aggregate consideration of Rs 3,041.50 million. With this PPTL, PWTL and PJTL will now earn additional annual transmission charges at the rate of 2.787%, 3.445% and 5.226% respectively.

The acquisitions were funded by a mix of internal resources and external debt. For the external debt portion, PGInvIT tied a loan facility for Rs 7,000 million from HDFC Bank Limited.

FINANCIAL REVIEW

Revenue, EBITDA and PAT

The SPVs of PGInvIT are in the business of power transmission. These SPVs earn revenues, i.e. availability based transmission charges, pursuant to the TSAs, from the DICs irrespective of the quantum of power transmitted through the transmission line. In addition, maintaining availability of the assets in excess of 98%, gives them the right to claim incentives under the TSAs. The transmission charges are contracted for the period of the relevant TSAs, which is 35 years from the COD of the relevant power transmission project, and is subject to renewal in accordance with the relevant TSA and the CERC regulations.

The total income of the Trust at a consolidated level was Rs 12,434.13 million in FY 2021-22. Of this, Rs 260.74 million was other income. EBITDA and PAT for the year stood at Rs 11,653.53 million and Rs 4,633.14 million respectively. EBITDA margin on consolidated basis is around 93.72% for power transmission assets with key cost components being repair & maintenance, insurance expenses, and IM fees.

(Rs in million)

Particulars	FY 2021-22 Consolidated
Total Revenue	12,434.13
Operating Expenses	780.60
EBITDA	11,653.53
EBITDA Margin (%)	93.72%
PAT	4,633.14
PAT Margin (%)	37.26%
Net Distributable Cash Flows (NDCF)	9,629.45
Distribution per unit (Rs) for FY 2021-22	10.50
Market Capitalisation*	1,21,848.89

*As per closing price on NSE on March 31,2022.

Net Distributable Cash Flow (NDCF) and Distribution Per Unit (DPU)

Net Distributable Cash Flows (NDCF) is the free cash flow generated from underlying operations. Cash flows received by PGInvIT can be typically in the form of interest income, dividend income and principal repayment. In line with InvIT Regulations and Distribution Policy of PGInvIT, it is required to distribute at least 90% of the cash flows received by it, to its Unitholders. During the period, the Net Distributable Cash Flow was Rs 9,629.45 million. DPU amounts to the cash flows distributed on a "per unit" basis to the Unitholders. The Trust distributed DPU of Rs 10.50 per unit for FY 2021-22. Total cash distribution to unitholders for FY 2021-22 was ~ Rs 9,554.99 million.

Assets Under Management

The registered valuer, RBSA Capital Advisors LLP, carried out the valuation as an independent valuer and valued assets of PGInvIT at Rs 1,02,295.30 million as on March 31,2022.

Assets	AUM (Rs in million)
PVTL	21,832.20
PKATL	4,515.90
PPTL	25,508.50
PWTL	28,701.20
PJTL	21,737.50
Total	1,02,295.30

Borrowings

The consolidated borrowings as on March 31, 2022 stood at Rs 5,755.85 million. The borrowing is a part of Rs 7,000 million loan facility tied up by PGInvIT with HDFC Bank Limited.

Credit Rating

PGInvIT is rated as "CCR AAA/Stable from CRISIL, ICRA AAA/ Stable from ICRA and "CARE AAA(Is)/Stable" from CARE.

Further, the Long-Term Bank facility for an amount of Rs 7,000 million has been assigned a rating of CARE AAA; Stable (Triple A; Outlook: Stable) by CARE.

Strategies and Outlook

PGInvITs business strategies are structured around a focussed business model with operational efficiencies to enhance returns while capitalising on value-accretive growth through acquisitions and maintaining an efficient capital structure - all this towards a single-minded focus of providing consistent, stable, and visible returns to the unitholders.

Power transmission projects characterised by low levels of operating risk and enjoying the benefit of a well-established regulatory regime with minimal counterparty risk ensure long-term visibility on returns and predictable cash flows.

Sustained investments in transmission sector will enable creation of a pipeline of transmission assets, which will create opportunities for PGInvIT to enhance its portfolio delivering value to unitholders.

Further, the National Monetisation Pipeline (NMP) formulated by Govt. of India envisages monetisation of power transmission assets of POWERGRID to the tune of about Rs 452 billion during FY2022 to FY2025 with emphasis on InvITs as one of the options for monetisation.

(Source: National Monetisation Pipeline)

PGInvIT with its robust foundation built around its core strengths which include a world-class Sponsor, an experienced Investment Manager, consistent cash flows, and a strong financial position is well-positioned to acquire new assets without substantially diluting unitholders interest for the benefit of unitholders.

Cautionary Statement

The Management Discussion and Analysis contains statements for describing the Trusts objectives, projections, estimates, expectations, or predictions. These statements are forward-looking in nature and are within the meaning of applicable securities laws and regulations. The Trust has undertaken various assessments and analysis to make assumptions on future expectations on business development. However, various risks and unknown factors could cause differences in the actual developments from our expectations. Important factors that could make a difference to the Trusts operations include macro-economic developments in the country and improvement in the state of capital markets, changes in the Governmental regulations, taxes, laws, and other statutes, and other incidental factors. The Trust undertakes no obligation to publicly revise any forward-looking statements to reflect future/likely events or circumstances.