India Grid Trust rating: Buy — KKR as sponsor will remove uncertainty

Move creates undercurrent of tangible gains; a long-term structural bet; ‘Buy’ retained

After a month of its withdrawal of intention to be a designated sponsor of India Grid Trust (IndiGrid), KKR has submitted a letter of intent for its induction as an IndiGrid sponsor. This is subject to unitholders’ approvals, and puts to rest the ambiguity around the new sponsor. We maintain that the role of a sponsor in an established InvIT is of little significance—as it doesn’t grant the sponsor any special rights.

That said,it does clear the air around any equity fund-raising as KKR, as a sponsor, would be eligible to pick up a stake exceeding 25%. IndiGrid is adequately funded for a scale-up in AUMs to ~Rs190 bn (currently Rs 133 bn). All in all, in a falling interest rate scenario and with potentially strong growth prospects, we maintain Buy.

KKR eyeing berth as designated sponsor: KKR has submitted a fresh letter of intent to the Investment Manager (IM) for its induction as a designated sponsor. This is a month after it withdrew its intent after the termination of its agreement for a 15% stake sale with Sterlite Power Grid Ventures (SPGVL), the original sponsor. This is, however, subject to unitholders’ approval (AGM scheduled for 28th September).

KKR as new sponsor: An undercurrent of tangible benefits— KKR is currently the single largest shareholder with a 23% stake in IndiGrid and it also holds 60% in the IM . KKR’s move does open up the way for some tangible benefits for IndiGrid—SEBI regulations provide sponsor (only) the right to hold more than a 25% stake. This implies KKR, for future equity fund-raising, can either float a preferential issue or underwrite a rights issue.

Outlook: A long-term structural bet— In a base case scenario, KKR and SPGVL are likely to be the co-sponsors of IndiGrid. We remain comfortable with demand/volume at minimal risk, visible & predictable cash flows and solid track record. Maintain ‘BUY/SP’ with TP of Rs 115. The stock is currently available with IRR of ~11.4% (with framework assets).