India Grid (IndiGrid) completed the country's second infrastructure investment trust (InvIT) on Friday, but struggled to build an outsized order book thanks to the lacklustre trading debut of the sector's first deal for IRB Infrastructure Developers.
IndiGrid began book building on Wednesday and bankers said the deal got off to a promising start, but then lost momentum after IRB InvIT listed on Thursday. InvITs are spin-offs by developers of completed infrastructure projects, intended to free up much-needed capital to boost the country's infrastructure drive.
"IRB InvIT had been trading at a 10% premium in the grey market," said one banker. "But there proved to be very little follow-on demand once it hit the secondary market."
As a result, the Rs64.5 billion ($724 million) deal traded down 1.06% over two trading days to Friday's Rs100.725 close on the National Stock Exchange, slightly underperforming the BSE Sensex Index.
IndiaGrid's 225 million unit offering, has nevertheless had its pricing fixed at the top of its Rs98 to Rs100 indicative range, raising Rs22.5 billion ($349.9 million) for the trust. This means there will be an 85% freefloat at the time of listing, leaving sponsor Sterlite Power Grid Ventures with a 15% stake.
Subscription statistics show that the institutional order book closed 1.14 times oversubscribed and the high net worth tranche 1.57 times oversubscribed.
Institutional investors were allocated 75% of the deal and high net worth investors the remaining 25%.
In turn, anchor investors were allocated 60% of the institutional tranche. Deutsche Global Infrastructure Fund, Credit Suisse (Singapore), Reliance Nippon Life Insurance Company, Copthall Mauritius Investment and Edelweiss Tokio Life Insurance were anchor investors in the deal.
As one banker commented, "Indian equity markets do not have a history with yield products and it's clearly going to take a while for this product to find its feet. Domestic mutual funds, for example, are very focused on growth stocks."
Big premium to government bonds
The disappointing reception to the sector's first two deals means others in the pipeline may have to offer higher up-front yields.
IndiGrid, an Anil Ambani-sponsored vehicle, offered investors a 10.9% yield (or 10.4% on a post withholding tax basis) for the first three financial years, 150bp tighter than IRB InvIT.
When it closed its own IPO in early May, IRB had been priced with a 12.4% lifetime yield on a post-withholding-tax basis. This represented a 540bp spread over Indian government bonds, which were yielding 6.95% at the time.
On Friday, Indian government bonds were yielding 6.7% while IRB InvIT was yielding 12.53%. This means the spread over risk-free rates has opened up to 583bp.
The difference between IndiGrid and IRB InvIT’s valuation can be explained by the fact that transmission assets offer far more predictable cash flows than toll road assets and also have a longer average life.
Getting more traction for the product is important given India’s infrastructure development goals and the banking sector’s lending constraints. And despite the less-than-stellar first few days of trading, bankers remain confident IRB InvIT will eventually bed down in the secondary market and the sector as a whole will trade in the high single digit to low double-digit yield range.
Similar to IRB InvIT, IndiaGrid's proceeds are being used to repay debt and free up capital to invest in new infrastructure projects.
The listco includes two projects — Bhopal Dhule Transmission company and Jabalpur Transmission company. These house eight power transmission lines of 1,936 circuit kilometres and two substations with 6,000 mega volt amp (MVA) transformation capacity across four states.
Future projects include eight interstate power transmission lines covering 4,831 kilometres and five substations with 6,630 MVA. The offering prospectus shows that these are generating higher Ebitda than the initial assets.
The lead mangers were Citi, Morgan Stanley and Edelweiss.
