Ladies and gentlemen, good day, and welcome to IndiGrid Trust Q1 FY 2021 Results and Latest Developments Conference C all hosted by Edelweiss Securities Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes.
Should you need assistance during the conference call, please signal to an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Swarnim Maheshwari from Edelweiss Securities. Thank you, and over to you, Sir.
Thank you, Neeraj. Hello, everyone. I welcome you all on IndiGrid Trust Q1 FY 2021 Results and Latest Developments Conference Call. Thanks for giving us the opportunity to host this call. I hope all the participants and their near ones are in the best of their health. From the management today, we have with us Mr. Harsh Shah, CEO of IndiGrid, and he's representing the trust over there. I would like to hand over the call to Mr. Harsh Shah for his opening remarks, and post which we can have a detailed Q&A. Over to you, Harsh. Thank you.
Okay. Thank you, Swarnim. I hope you can hear me loud. Is it fine?
Yes, sir.
Okay, thanks. Thank you, everyone, to join us today evening. I'm just cautioning in case our lines dropped, we will dial back soon. The networks haven't been great in Mumbai, so in case the lines drop, Chorus team will connect me again, and we'll restart from where we dropped off. Welcome, everyone, on our call. This is the quarter one call for FY 2021, and we've just finished a board meeting and published the results today. I would be taking through the investor presentation, which we have circulated today evening, and after that, we will take through question and answer subsequently.
For the document sake today, we have published investor presentation, result sheets, valuation report, and other details. In case you have a question, we can refer to those documents subsequently once the investor presentation is finished.
On quarter one, slide number three, as we say, we are going to start with our vision and journey. On slide number five, as we said, our vision is to become the most admired yield vehicle in Asia. We are focused on a business model with long-term contracts, low operating risks, and stable cash flows, focused on value accretive growth, deliver predictable DPU to our investors, and follow optimal capital structure. This has been our vision, and we believe we have been living that. In the next slide, as you can see, IndiGrid is India's only power transmission yield platform.
Some of the statistics that we have provided showcases our AUM is about INR 12,000 crore today with 20 lines and 5,800 circuit km, four substations, and 7,700 MVA of transformation capacity. We are rated AAA, and our residual contract life is 32 years.
Our key highlights for Q1 FY 2021 is on slide number eight. Before I go through the key highlights of slide number eight on Q1, I would like to also sadly inform our investors what we have already done to the exchanges, that one of our board members, Mr. Shashikant Bhojani, lost his life in last month.
He had been a key member of our board since the IndiGrid was conceptualized, and he had played a very crucial role in formation of IndiGrid, as well as building IndiGrid from where it started and where it is today. We are sad to lose him, and I think it will be difficult to fill his gap for us. This happened in Q1, and therefore, before we start the business presentation, I thought I would pay my tributes to Mr. Bhojani.
Coming to Q1 highlights, I think our financial track record has remained robust. Our EBITDA has grown 74% year-on-year basis, the quarterly EBITDA, and this is backed on the asset that we had acquired last year. Our distribution payout, we have announced is INR 3 a unit, including in the COVID uncertainty times, and we are paying INR 3 a unit entirely as interest. Our net debt to AUM remains at 50% and significantly below the 70% cap put in by SEBI regulations.
Our ratings by all three rating agencies were confirmed after COVID times around April and May month, so we remain AAA. There are two announcements that we did during the Q1 for acquisition of Jhajjar KT Transco Private Limited from Techno Electric & Engineering Company Ltd and Kalpataru Power Transmission. That share purchase agreement is assigned, and we are awaiting regulatory approvals for that.
We also took approval for Gurgaon Palwal Transmission Limited from investors to acquire. On COVID times, I think the most important point for us was that there's been no material impact on health of our employees and partners who work with us. There have been zero COVID incidents on our portfolio, including with our vendors. In general, power demand slowed down for the first two to three months. That has recovered and no material impact is to be seen. We'll cover that in the next slide.
Our collection track record, while it went down in quarter one, it is starting to recover. We'll discuss those numbers in detail. On the regulatory side, there are two new updates. SEBI issued two circulars, one for induction of a new sponsor, in case somebody wants to become a sponsor or an investor wants to cross their shareholding beyond 25%.
The second part of the circular covered if a sponsor wants to declassify themselves as a sponsor after the due lock-in of first three years, what is the process to be followed? These are the regulatory evolution that has taken place in quarter one. On slide nine, I would just reiterate on the COVID impact.
On the right-hand side is the data published by POSOCO, which is our national load dispatch center. As you can see, March and April were extremely low, both in terms of peak demand, the chart above, and overall energy consumption, which is energy met in the chart below. As we can see, once the lockdown is opened up end May, early June, we have seen electricity demand catching up.
If you just track the first week of August or the last week of July data over here, both peak demand as well as energy consumption has slightly crossed what was there in the same months in 2019. We will continue to monitor this on a month-on-month basis to see if there is a recovery in terms of electricity consumption. Just to note that our transmission tariffs are not linked to power flow and based on availability of transmission elements. However, in general, for the health of the sector, it is important that power demand is a good metric to be tracked.
What we have seen and shared also, the impact on our collection, I believe this is a question which was asked several times on the calls before. We have showcased the collections that we have received from the pool over the last four months.
In April, which was the peak of the lockdown, we received 40% collection. In May, 58%, in June, 84%. Gradually it has increased, and overall, in a quarter-one basis, we have received about 60% collection, which we had thought about and disclosed that we would be expecting about 50% collection in quarter one. In July month, first month after the lockdown opened up, we have reached 104% of the collections.
We believe it's a good sign of recovery. However, we would like to monitor this number on a month-on-month basis, on a quarter-on-quarter basis, and we will remain conservative till that time. The next slide is on operational highlights, on slide number 10. As you can see from our track record, our availability for most assets have remained at a maximum, and we have earned incentives.
On the safety side, we have ensured that 100% safe man-hours have been achieved. We are investing a lot in cultural and behavior-based safety enablement for our employees as well as our partners. Considering that we operate in an electricity environment, in a live grid environment, safety is something which is of highest order of priority for us.
Besides safety and training for that, we have also shared some of the critical parameters for operations and reliability, which includes trips per line. On a quarter-on-quarter basis versus last quarter same year, it has improved marginally, and we would look to follow the best global standards to achieve better reliability in this regard.
On COVID especially, we are putting additional efforts to ensure that all people, including our partners and contractors and workers on the ground, about 600 in all, remain safe and ensure 100% compliance with statutory guidelines, including that our substation facilities have been substantially quarantined to ensure that those people who operate the substation remain safe. On slide number 11 is the financial highlights of this quarter. Our revenue and EBITDA both have substantially increased versus the same quarter last year.
This is on the back of the acquisitions that we completed last year. Along with that, our DPU, as I said earlier, we are paying INR 3 a unit as interest. This is our 10th consecutive distribution as INR 3 a unit. Since listing, we have distributed now approximately INR 36.56 a unit to investors. Our DSO days are at 101.
As we discussed, our collections were low, therefore, we have stretched DSO days due to COVID delays in quarter one collection. Quarter two, July month has been encouraging, we'll continue to watch that number. The slide number 12 describes our EBITDA to NDCF bridge. On the extreme left is the income, after expenses at SPVs, we have reached the EBITDA of INR 331 crores. Of that, SPV level interest is minus. The working capital has improved, I would describe that's largely because of factoring.
We have chosen to sell receivables of quarter one, which is called factoring, to ensure that we are able to maintain our NDCF as well as DPU for quarter one. Our loan repayment of INR 5.7 crores has taken place, and we have created reserves at SPV with the factoring support to ensure that we can survive if there is further delays of collection. Our NDCF upstream by IGT at SPVs to IndiGrid is INR 253.8 crores. We have majority of the loans at IndiGrid where we have paid INR 80.7 crores of interest, and there are marginal expenditures done at IndiGrid.
At IndiGrid NDCF consol, we have INR 191.5 crores of NDCF. Of that, we have created reserves of INR 16 crores and decided to pay INR 175.4 crores as distribution, which is equivalent to INR 3 a unit. On slide number 13 is a slide which we presented last time as well.
There is no material change versus last quarter to this quarter, except a few borrowings that we have done this quarter. We are, as I mentioned earlier, still rated AAA by all rating agencies. Our weighted average cost of debt is at 8.6%. We have reached 50% net debt to AUM, and as per SEBI regulations, after crossing 49%, our level of disclosure have increased and therefore you will see valuation report and other reports are being available on a quarterly basis going forward. We have a substantial amount of cash balance.
That cash balance is towards the, which we have held for distribution for quarter one. About INR 138 crores is also for DSRA, which is a debt service reserve account, and the subsequent cash which we have borrowed for subsequent acquisitions.
On slide 14 is just a performance track record since we listed this, we have presented on a quarter-on-quarter basis. There are three important points on the slide. One is the beta. We've remained a very low beta and low volatility stock in comparison to other comparable indices or stocks. We have distributed as a total return, 42% to our investors. Out of which 34% is largely coming as a DPU, and the 9% is a price change, till July 31st that it represents. This is substantially higher than comparable indices and investment alternatives to investors.
We believe that with a low volatility and stable return, we will continue to provide superior returns to investors. Slide 15 is about recent development, for which we recently announced our disclosures on this week.
There was an agreement between Esoteric II, which is an affiliate of KKR and SPGVL to transact on 15% of IndiGrid units. This agreement got automatically expired in July 2020 on the long-stop date, as the transaction could not be consummated by that date. In light of the above, Esoteric II has also withdrawn its intent to be designated as a sponsor of IndiGrid.
On the right-hand side, we have stated some facts that equity capital required for the significant asset growth that we are foreseeing, especially the framework assets, has already been raised by IndiGrid, and that is also one of the reason that IndiGrid net debt to AUM is just 50%. Esoteric II remains still the largest unit holder at IndiGrid, and KKR owns 60% of the investment manager and has also contracted to increase it to 74% by May 2021.
The next slide, on slide 16, is just a comparable with the global yield platforms and how IndiGrid positions itself, both in terms of size and yield as a spread over a 10-year G-Sec of the local G-Sec. I believe it offers a good risk-return reward to investors, in comparison to global indices and global opportunities to invest in such yield platforms. Slide number 17 is just describing that data into a tabular manner, and we can address some questions if there are there on that. Looking ahead, I think for outlook for FY 2021, our focus remains on providing superior returns, stable DPU, and growth in NDCF.
We believe we can achieve that if we execute on our portfolio growth strategy to acquire GPTL, KTL, and NER projects for which we have done framework assets. Also evaluate selective solar opportunities with central counterparties for which we took approval.
Create a pipeline of transmission projects beyond framework assets as well. While we do this, we will ensure that our focus on balance sheet strength is maintained. Considering the fact that we are going through a Covid environment and slightly uncertain, and unpredictable scenarios can pan out, we would look to maintain sufficient cash balance and working capital lines, and also we'll aim to diversify our debt sources as we look to acquire other projects. Our focus on operations will remain as one of the most important priorities. We'll look to deliver 99.5% availability across the portfolio.
As committed in our Quarter Four presentation, we'll look to invest in technologies which enable better asset management, including digital asset management, predictive analytics, and a better emergency preparedness. We'll look to increase our focus on ESG initiatives that we kicked off in Quarter Four.
As we do that, we'll follow that we ensure that world-class EHS standards and O&M practices are followed in our portfolio. We'll continue to work with industry participants and regulators to ensure that overall market for InvITs and IndiGrid per se, grows and there is increasing investor awareness about it, also regulatory awareness about it. We believe that there are a few policy initiatives which we have been publicly pursuing, which is to allow IRDAI and PFRDA to enable insurance companies and PF companies to subscribe to debt securities of InvIT.
We'll continue to pursue that, and we'll continue to look if there is an opportunity for reducing the lot size to a single unit. While this was approved last year when 5 lakh lot trading lot was reduced to 1 lakh trading lot by SEBI. However, it was not made toward a single unit.
We would look to focus on that as well with the regulators. I would actually stop the initial presentation from my side because I recognize that there is going to be questions around several points so that there is enough time for investors to ask questions on critical matters. Swarnim, I would request you to take over and open up lines for Q&A.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question, you may press star and one on your touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we'll wait for a moment while the question queue assembles. Anyone who wishes to ask a question, you may press star and one. First question is from the line of Mohit Kumar from IDFC Securities. Please go ahead.
Hello. Yeah, good evening, sir. Congratulations on good numbers. My first question pertains to the fact that, of course, the sponsor change is not happening. How does it affect us as a business? Do you think that the Sterlite or the sponsor are still looking for an exit? Can you comment upon that? Secondly, on the investor manager, does KKR is still on the path to acquire the another 14%, or is there any other some kind of different understanding?
Okay. Thanks, Mohit. To answer your first question on the recent developments, I think one is there is no impact on the existing business that we own on account of any of this. This is between the two shareholders where the pact has not worked. I would say that there is no impact on the business at the moment. Will Sterlite look to exit is something, a question probably better directed to Sterlite directly, subsequently.
On the investment manager side, KKR has retained 60% of the manager and therefore, majority. At the moment, I'm not aware of any other developments. It is a contracted transaction between both parties to transact on 14% on a specified date in future.
Thank you. Second answer on the receivables issue. How the receivables have behaved from March 2020 to June 2020 in amount terms? Can you quantify that amount? Related to that, is there any change in plan for acquisition of the other two assets which you're planning to acquire by the end of FY 2021 somewhere? Has their timeline changed? I'm just trying to figure out.
Okay. I think first is on the receivable side. I think we have approximately, and I don't have month-on-month exact crores number, but we have approximately INR 120 crore of monthly revenue. Right. Therefore, we have collected, in Quarter One, approximately 60%, which is approximately INR 220 crore of INR 360 crore. Right. An approximate number in terms of cash collection, which is about 60%. I'm not counting July month in that right now. That's a Quarter One collection. The second question that you asked was on acquisitions. Can you be specific which acquisitions you were trying to ask?
Large acquisition which you're acquiring from Sterlite.
Okay. Sorry, there are not two acquisitions from Sterlite. There is one acquisition which is with respect to GPTL, which is announced, and we have taken investor approval with respect to that. We don't have a signed SPA at the moment. As and when we reach the closure of that, we'll make the necessary announcement. I believe we had made a fair amount of progress on the diligence, and that is why we came to investors to take approval for that acquisition.
That is the only acquisition for which we have announced the acquisition and taken investor approval. The other two projects, which is KTL and NER, are both framework projects where IndiGrid and Sterlite Power has an agreement on. We are monitoring the project progress of both projects. Both the projects have not achieved commissioning at the moment, and therefore, as and when they achieve commissioning, we'll look to start the diligence and follow the process mentioned in the framework agreement.
Understood, sir. Thank you. Best of luck. Thank you.
Thank you.
Thank you very much. Next question is from Sarvesh Gupta from Maximal Capital. Please go ahead.
Hi, Harsh. Good evening, thanks a lot for taking my question. First thing, this long-stop date which has expired between the two parties. Is it because Sterlite wanted to transact at a higher price because it has moved from the initial price to the current market price? Why the long-stop date has not been extended for KKR by Sterlite?
This is Kunal, right? Sarvesh, sorry. Sarvesh, I think this is a question which I'm not party to, right? This decision is between two shareholders, independent shareholders, and therefore, I do not have an answer to that, and probably, you can address it separately to Sterlite and KKR beyond the call, but at the moment, I'm not aware of that reason.
This is very important for the unit holders to understand who is going to be the sponsor, because we don't know as of now if KKR does not want to become a sponsor or they haven't been given an opportunity.
Sarvesh, what I can explain is that InvITs, and let's say specifically for IndiGrid, it is a manager-driven entity, and most of the decisions as well as business is run by the investment manager, where KKR is majority. It's a professionally managed entity. On the sponsorship, I think the only privilege, if I may say, of becoming a sponsor under InvIT regulations is to be able to own more than 25% of a particular InvIT.
Yes, at the moment, KKR has withdrawn the application, and therefore, we do not have a financial sponsor who can own more than 25%. However, on the business, will that have an immediate material impact? I believe as we stand today, the business is as usual. Right?
It should have been Sterlite's responsibility to get this approval for change of sponsorship, right? I could not understand why we have come to this impasse. Right now there's so much uncertainty because what will KKR, for example, do with holding 60% in the investment manager, which is having revenues of few million dollars if they are just a financial investor in the overall setup?
There are too much of uncertainty regarding who is going to be their sponsor, because technically now Sterlite can also sell because their lock-in period has ended. If they sell, then what is their role? Why are they in project management? Why is KKR on the investment manager?
I think I personally felt that it should have been the responsibility of Sterlite who has transacted with KKR, on which basis funds have been infused, on which basis all the acquisitions have been done primarily for Sterlite promoter entity assets. This clarity needs to be given to the unit shareholders because it is very important for us.
Yeah. No, Sarvesh, I understand. I think just to clarify, the manager controls the InvIT, right? Esoteric II, which is affiliate of KKR, still remains the largest shareholder of IndiGrid. Investment manager, where the decisions are made, the corporate governance is coming out of that, and that's where they remain the majority shareholder. Therefore, I would say investment manager is probably a way to ensure that the business decisions are made in a particular manner than the business in itself.
However, it is a business in itself, but the core reason is to ensure that governance is followed over there, and that's where KKR remains majority. I think, I would kind of not comment on whose responsibility it is because SEBI did come up with the regulations in July. Could it be done earlier? We don't know. I think at the end of the day, there were lack of clarity earlier. On a responsibility side, something which I'm not able to comment whether it's Sterlite's responsibility or KKR. At least we are focused on managing IndiGrid. That's how I would put it.
No, going forward, what is the stance of Sterlite? Are they going to hold this 15% units, which they can technically now sell or not? If they can sell, what is the roles and responsibility of a sponsor going forward? There is a case now that nobody will be a sponsor if they decide to check out as well.
Okay. See, being the sponsor and amount of ownership are two different things. SEBI regulations provides for the sponsor is the person who forms the index and takes it public, and the sponsor has a three-year locking requirement. After that, there is no locking requirements for sponsor to hold it. However, SEBI has clearly specified what are the roles of sponsor, which has largely to do with contributing assets at the initiation and providing disclosures around that.
Subsequently, it is manager's business to run the index and therefore, technically, even if Sterlite sells, they will still remain a sponsor and the business would run probably as is because the sponsor per se does not have a role in running the business. The manager is running the business.
Understood. On your receivable side, you have collected INR 220 out of INR 360. Remaining INR 140 has been factored, and if yes, then at what interest rate?
Okay. I think one is it is factored. Yes, INR 140 has been factored. We haven't disclosed the interest rate in the result sheet for the specific transaction. I will just check if it is disclosed. If it is disclosed, then we can talk about. Otherwise, I can just say that an interest rate is linked to MCLR of the bank, and it is at a market term or a fairly reasonable terms.
Understood. I just feel that if we can take this feedback from unitholders on this call to the sponsors, I think that would be useful.
Sure. Thank you.
Thank you so much.
Thank you very much. Next question is from Hitesh Arora from Unifi Capital. Please go ahead.
Yeah. Just a couple of questions. On this, KKR acquiring the balance 14% stake by May 2021. What's holding them from acquiring now, and why do we have to wait till May 2021? Is there any long stop date, anything to be worried about? What's holding them there? I believe the amount involved is quite small.
The second question is, could you let us know is the completion date of any other bigger assets, is that on time? We were expecting it to be done by November of this year. How's the work progressing? Is that on time? The third question was, could you throw some light on a further expansion by beyond INR 18,000 crore? What is the plan there? How do you look to raise the fund, et cetera, timing, regulation, et cetera, if you could throw light on that.
Okay, fair enough. I think to answer your first question again, it is an agreement between the two shareholders of the manager to transact on a future date. Nothing is holding up the transaction. The transaction is structured in a way that it was to be transacted. This 14% was to be transacted 24 months from the date of first transaction, and therefore that is how it was structured between the two shareholders of the manager. That's what is going to take place in May 2021.
The second question was on NER. I believe there are two things. One is, we do get understanding of what is the project progress of NER on a time-to-time basis. We believe it is on time. However, we cannot say it accurately because that is something, again, which is Sterlite Power is executing on a project basis.
However, I can say that at least the details that we had received or disclosure that we had received that NER is on time of November or December that you mentioned. Again, it is based on the inputs that we received from Sterlite Power. Your last question was on growth beyond INR 18,000 crore. I think growth beyond INR 18,000 crore, one is we already capitalized till INR 18,000 crore.
Growth beyond INR 18,000 crore would require us to raise further capital. I think there are a few modes available, both preference issues as well as rights issue in which to raise subsequent capital. We've raised as a preference issue last year. That is when large investors like KKR or GIC participated and we could grow the portfolio. I think beyond INR 18,000 crore, we would have to raise capital.
That would be via rights issue?
Hitesh, it is difficult to commit at this point in time. I hope you appreciate because our shareholder dynamics have overall shareholding mix also changed. Whether we go for a preference issue or a rights issue has to do with few things. One is certainty of a capital raise, right? That which method is going to provide certainty and speed of capital raise. Second is also a wide range of investors who can participate and not participate. Third is speed and execution in markets. I think we need to factor in all these few factors to make that decision. At the moment, we don't know that.
The regulation allows rights issue now. Earlier it didn't, I believe.
Yes, regulations does allow rights issue now.
Do you have a timeline? You have a vision of INR 30,000 crores in AUM.
Yeah.
What's your sort of timeline there, by when? Because that would also determine the time of the capital raise.
I think I'll give it two directional views on that. One is you ask a rights issue or preference issue. I think one important point to check between the two is rights issue has a requirement that we need to have at least 75% of the success, right? If it is lower than that, it anyways can't go through. Therefore, we also need to see that whether our investor base or 75% of the investor base will subscribe or sell or will be able to raise capital via that.
Preference issue to that extent makes it easier and the thresholds are lower. Timing is something which depends on the asset visibility. As and when we see more assets coming to a concrete stage of acquisition, we would look to do capital raise.
Even there is a certainty of more assets coming in, we would have to look capital raise. I think that depends on how overall market plays, how the growth plays, et cetera. At the moment, we cannot comment on when we are going to raise capital. Yes, we have given a guidance that we have a vision to be INR 30,000 crore by 2022. As and when we cross INR 18,000 crore, we would need to raise capital.
When we will cross is something dependent on progress of framework asset, acquisition of framework asset, more opportunities being available. I think it is linked to many market factors, right? Tough to provide a timeline on that.
Okay. Just on the first question, KKR will buy the 14% stake in May 2021 or they will buy May 2021?
No. As per the agreement, it is in May 2021.
It is in May 2021.
Right.
Okay. I hope there's no negative surprise here, like long stop agreement like we had with this current issue.
Sorry, Hitesh. I don't see every agreement as a long stop date. At the moment, there is no negative surprise that I am aware about.
Okay. Thank you.
Okay.
Thank you very much. Next question is from Hemant from Baring Advisors. Please go ahead.
Hi, good evening. Thanks for taking my call and I hope you've been safe. Since the last time we spoke, I had only one question on prospective asset acquisition. You've made great progress over the last year and given the long-term trajectory of reaching INR 30,000 crore in AUM versus where we are today, how are you looking at asset acquisitions?
The investment manager's incentive structure is tied somewhat to maximizing AUM, whereas the unit holder's incentive structure is tied to maximizing distributions per unit. How are you looking at the asset acquisition landscape? Are you getting assets which will be acquired at or above the prevailing distribution yield?
Okay. Thanks Hemant. Good question. I think I would just clarify, from investment manager perspective or at least the executive's perspective, our incentives are not linked to the AUM growth. Largely our incentives is to do with operating performance and NDCF of IndiGrid. In addition to that, even our long-term incentive structure is largely linked to IndiGrid value creation and not with respect to asset growth, right? That's just a kind of a clarification on that. Yes, investment manager as a corporate, as a company, if the AUM grows, EBITDA grows, earns a higher fee.
However, you would see that our investment manager fees are fairly small, and we cover our cost with that. At the end of the day, for the assets that we acquire, large assets that we acquire, we need to raise capital as well, right?
As and when we raise capital, we'll have to prove the business case to investors to enable such capital raises or asset acquisitions. There is enough checks and balances in the overall governance framework to mitigate that. The second question, do we see assets which will add to the yield? I would say yes. I think overall growth depends on finding the right quality asset at the right price and also having ability to have access to capital at the right time.
I think at the moment, I can say that we have visibility on the INR 18,000 crore of AUM for which we have raised equity. Capital visibility is there. We have some kind of agreement with Sterlite Power to have visibility on those assets, right? Beyond that, we will have to see, right?
At this point in time, yes, our vision is to go there. We will look to acquire assets. We have already announced two acquisitions which are not from Sterlite Power. We will look to evaluate. To give anything concrete as a guidance on that is difficult for us today.
Excellent. Thank you for clarifying. That's very helpful. One question on the financing. Given the low rate environment that is prevailing everywhere today and given the AAA credit rating, are you sort of thinking about raising capital in non-INR currencies?
See, we are exploring all the capital-raising options. While non-INR currency bonds have happened, the market was dislocated over last couple of quarters, right? As you would appreciate because of COVID and other things. Also we need some more regulatory clarity regarding in which to be able to do, I would say, offshore bonds, right? We are exploring that. Like any other borrowing options that we do, we keep exploring that.
Got it. One last question from my side, this is one on the PoC mechanism with Power Grid as a counterparty. Very nice to see collection sort of ramping up in the last three months. Assume there is a relapse of COVID and collection falls. What are the protective mechanisms in place which will ensure that the collection period does not get extended beyond the 100 days that you have mentioned?
A very difficult question even to [inaudible] COVID is uncertainty. You asked the question, what if uncertainty extends beyond the point and collections do not meet, right? Now I would say it depends on the balance sheet of the company, and we have been conservative. We would need to watch our balance sheet and cash balances available. If the collection were to go bad, we will have to watch our cash balance and use from our balances to survive.
Whether collections will go bad or not, all the mitigants are there already. Transmission charges are a very small pool of the distribution customers, and therefore we have not seen such even COVID kind of scenarios over the last five years in terms of collections dropping to 40%. This is a black swan, and if the black swan expands to a year, I think it will be less to do with PoC, but more to do with balance sheet and how much cash and headway we have to continue that.
Excellent. On that note, I wish you well and great progress over the past year, and I look forward to great progress in the future as well. All the best.
Thank you.
Thank you very much. Next participant is Kunal Agarwal from Individual Investor. Please go ahead.
Hi, Harsh. I hope you're doing well. I had a couple of questions, and I know you've talked a lot about what's been going on in Sterlite and your limited ability to comment on it. Just on that note, again, we understand that there is a pledge that Sterlite created on the IndiGrid stake, and that pledge, I believe, is with a well-known NBFC and it's up for payment rather soon.
Now, if Sterlite has canceled their agreement with KKR, what's their plan to liquidate their stake? They're going to have to pay this money pretty soon. Are they going to be selling this in the open market? Won't this create a pretty large overhang on our share price or our unit price? Generally, I don't know to what extent you can comment, but is price the only reason here that we're seeing a disagreement between KKR and Sterlite?
Okay. I think, Kunal, a lot of questions. I would simply put, yes, the units are pledged, and we have made adequate disclosures last year on this for the loan. IndiGrid is not privy to the maturity date. It is not possible for me to comment on when is the maturity of this loan. I'm not able to comment on whether it is soon or late.
What is Sterlite's strategies? Again, I cannot comment whether they are going to sell it on the market or otherwise. It's beyond me. I think probably best answered by Sterlite privately on that. The next question also, what you ask is again between two parties, right? KKR and Sterlite Power who were to transact. They have decided not to transact. At least the intimation that we have, we do not have any rationales or reason provided to IndiGrid, so difficult for commenting on that for me.
Okay. Just on the point on the investment manager. I believe the board is quite balanced, and the manager, I think there's one appointee from KKR, one appointee from Sterlite, and the rest is independent and yourself. I was just trying to understand what is the new dynamic going to be at the board level there, assuming KKR and Sterlite aren't necessarily seeing eye to eye. Is there any concern that we have of indecision or anything like that playing out at the board? Can you give us some comfort on the fact that at least at the decision level, the business will keep functioning normally?
Kunal, I think, all the board members, including me, have a fiduciary role to make decisions in the interest of the InvIT, right? Therefore, it's a professional board, and we look to continue to do that. I won't comment on, again, dynamics is good, bad. Actually, I don't think both dynamics play a role over here. All of them are accomplished professionals, and we have a fiduciary role to perform. We have done it for a long period and would do that.
Got it. Thanks. Last question, Harsh. Is this the right time for you to be giving us any DPU guidance going forward, or is this sort of an evolving situation and we should sort of wait and watch over the next few months, quarters?
Sure. I think we have refrained from giving guidance this year. We just want to wait out the collection scenario on how it pans out. As we showcased, the July collection have improved. We would like to monitor it for a quarter more before being confidently providing the guidance.
Understood. By the way, congratulations on this factoring agreement or mechanism that you guys have worked out. It's a very innovative structure that you guys have thought of in this time. I know there's limited stuff you can comment on it, but what is the duration of the factoring that you do? Is it like 180 days, 210, 270? What is the period up to which we become bound to pay? Are we factoring 90% of our receivables, 100%, 80%? Is the cost of the factoring lower than the overdue fees that we will receive for late payment?
Okay. Simple answer, factoring typically is low duration. It is starting from 30 days to 120 days factoring of receivables.
Okay.
We have not done all our receivables factor. We have only done it in two legal entities called JTCL and NRSS. Therefore, we have not done it in all legal entities. Just adequate to pay NDCF. Last question. Sorry, I missed your last question. If you can repeat.
My last question, I just wanted to make sure that the cost of the factoring is lower than the-.
Okay.
Sort of overdue fees that we get or the overdue interest that we get on late payments.
Oh, yeah. Certainly. The overdue late payment charge is substantially higher than the cost of discounting. Correct.
Okay. Got it. Thank you.
Yeah.
Thank you very much. Next participant is Dhruv Muchhal from HDFC Asset Management. Please go ahead.
Yeah. Thank you. A somewhat related question to the earlier one. Just wanted to probably understand the basic structure of the investment manager, if you can please help us understand that. I believe the key role of the IM is to get and approve new deals, and present it to the board. Is it right?
I mean, Dhruv, there is a much bigger role because, in this case, there is a very long schedule of responsibilities with the investment manager. It is not just the new deals. For example, for ensuring that the assets run in order, ensuring the financials get reported in time, investor relations, capital raising.
In a normal parallel, if I were to communicate, if you take out the management team of a company and house it in a separate legal entity, is the investment manager. Right? As a parallel. It's like any other company, most, the senior management team is housed in the investment manager, and they need to do all the functions which are required to run.
Okay. In our current structure, the majority will be from the KKR side, 60% of the representatives will be from the KKR side in the current structure.
Yes. That is a shareholding. At the moment, KKR has right to nominate two directors. They've chosen to nominate only one right now, but it will be proportional to the shareholding.
Okay. I'm just trying to understand, currently Sterlite owns 40%, probably it will go to 26 if the deal happens, assuming it happens. What is their skin in the game? This is, of course, assuming that the 15% also comes in the market if they are forced to sell. What's their skin in the game? I mean, what is their responsibility to probably act in a particular fashion or not act in a particular fashion?
As I said earlier, skin in the game. Let me repeat the question. The people who need to act in the interest of IndiGrid is the investment manager, whose role is to ensure that IndiGrid runs well, in a manner provided, disclosed, and in a good governance manner. Therefore, whether Sterlite Power owns 15% of IndiGrid or owns zero, investment manager's role remains the same, and we keep doing our role. I think these two are distinct items, and there is probably no linkage to that.
This is something which is for all InvITs, it was very clear that a sponsor is required to lock in 15% of the units only for the first three years, which took into account that the role of sponsor is limited and the role of manager is superior.
In case the majority investors believe that the manager is not doing their role well, they have right to replace the manager as well. Right. The skin in the game would be for the managers to ensure that you perform in a good way so that IndiGrid and the trustee retains you as a manager. If you fail to perform, then IndiGrid unit holders and the trustee put together can decide to change the manager.
Previous two, further clarification on this is, firstly, in terms of compensation to the investment managers or probably to Sterlite, if it owns 40%. I mean, if interest after say, assuming it has disposed of 15%, not remaining the sponsor, not owning anything in the trust, just as an investment manager, is the fee that it gets as an IM representative, is it? There is something else also, there is other kind of compensation in terms of probably, I'm not sure, but is that the only compensation that it gets?
Yeah. No, that is correct. I think one is that Sterlite is 40% shareholder of the investment manager, and that is one economic interest. The second economic interest is that Sterlite charges or rather IndiGrid has paid Sterlite 10% of the overall O&M expenditure that it does as a project manager.
This is again part of the SEBI regulations which require the project manager and sponsor being a project manager has better relaxations, that the project manager is supposed to supervise the O&M, and investment manager is supposed to supervise the project manager. Therefore, Sterlite Power is today a project manager also. We pay 10% on our overall O&M spends to Sterlite Power. However, these sums are fairly small in overall size of things, in scheme of things.
To give you a perspective, our annualized revenue is approximately INR 1,200 crores, the annualized O&M cost would be somewhere around INR 70 crores-INR 80 crores, therefore, Sterlite gets approximately INR 8 crores-INR 10 crores for providing this service.
Okay. The economic interest in the IM is not the key driver to own any stake in the IM?
I won't jump to that conclusion, right? Because it is a different legal entity, and there is an economic interest in that. Now, which one is higher or lower is something which is [crosstalk]--
Yeah. Okay.
--not for me to predict, right?
Yeah. True. From a governance structure, the IM reports to the board of the InvIT.
Board of the InvIT is the investment managers board is the IndiGrid board.
Okay.
The board that we present is the investment manager board. Whatever decisions we take as a board comes to either unit holders, if it is a material decision like related parties, et cetera. Also, most of the decisions are ratified by the trustees, that this is in line with the governance requirement of InvIT regulations.
Okay. Assuming a scenario where the IM is to be changed, say for instance, for not performing to the mark, whose responsibility is it? Who does it? Is it the trustee who initiate it, or is it the shareholders who actually do it?
Let me first clarify, I am CEO of the IM, right? Let's say if at all we are not doing a good job, about 20% of the unit holders [crosstalk]--
Okay.
--to align and call for an EGM via trustee, and then call for a vote. Okay? Based on that vote, it can be decided that we want to change the investment manager. That's the procedure I'm explaining.
Got it. Understood. I think that's it. Thanks a lot.
Thank you.
Thank you very much. Next participant is Vipul Shah, an individual investor. Please go ahead.
Hi. Good evening, sir. I have a question. Suppose there is a deterioration in COVID situation and your collections fall, will there be a reduction in the DPU going forward?
I would say that, look, it's again a forward-looking statement. Our business is based on collections largely. If there is a fall in collections, that would impact our ability to pay DPU. Will it fall, not fall, is again dependent on the collections that we get, right? If you say, wild scenario, if there is zero collection, then in that scenario, obviously, where are we going to pay from? I think it's a hypothetical question. If collection falls, will DPU fall?
I won't say it's a direct proportion, but if beyond the point collection falls, in that scenario, there can be a risk of DPU falling. Having said so, as I said, July collection seems to be healthy. At the moment, I think we are looking forward to monitor over next couple of months the collection pan out. Right?
Sir, if I ask you differently, to maintain a DPU of INR 3 for next three quarters, what percentage of your receivables you should receive?
Okay. I think that will require some math of our financials.
No, very rough guesstimate, sir.
See, we collect INR 360 crore of revenue a quarter, right? About INR 360 crore of cash. We pay about INR 175 crore of DPU, right? If we were to pay INR 3. Our outstanding borrowing and the interest calculations are showcased in our quarterly results. I'm not able to get the exact interest outflow. You can just multiply and said our cash collections minus interest payments, minus O&M cost, minus collection, will give you that number. I think I'm just showing a way it can be calculated. I don't have the exact numbers right now with me to be able to make that scenario for you.
Sir, I think this question also has been asked previously, but I am curious to know about the terminal value of these units beyond the 35-year agreement. What will happen beyond 35 years?
Okay.
I am an individual shareholder, so please bear me, but I'm very anxious to know what will happen after 35 years. Yeah.
Yeah. Fair enough. No, I understand. If you go to slide six of our presentation, and this is something which is an increased disclosure we have started from last couple of quarters to help investors evaluate this. In the overall portfolio that we own today, there is 343,000 tons of steel and aluminum. Okay? I'll come to where this argument goes. Let's say we fast-forward and reach 35th year. Okay?
Mm-hmm. Right.
Either government or other country would require us to be used as a transmission line, right? If it is the case, there are two scenarios. One, government will provide us probably a cost-plus mechanism. There have been few past circulars where there are directional judgments of CERC. Again, we need to see what is the commission that decides on that date.
Therefore, probably, we would be able to work on a cost-plus basis to extend that contract, okay? If we were to be continued as a transmission licensee. Okay? The second scenario is that, there is something that has happened, and these lines are not required anymore after 35 years. Right?
In that scenario, this material, the metal is ours. Okay? What will be the value of this size of aluminum and steel is something, again, I can't predict 35 years down the line. It is a fairly significant value today itself, right? If you forecast that in 35 years down the line with whatever inflation assumption you may want to take, probably that will be the scrap value that will be available to us. Right? That is a significant number.
You can run that math based on the price that you want to assume. That's a significant price. Therefore, either way, there is going to be a significant value of some kind, whether in form of metal value or in form of extended contracts. Either way, there is a sizable value. Which one would pan out, how will it take place? I won't be able to commit because it is way too much in future, and the impact of that today on NPV terms again, is very going to be small.
Okay, that will be the only asset with the unitholder, right, in the event of contract not being extended?
Okay. That's correct. Fine.
What is the expected lifespan of this asset generally?
Generally, the lifespan of the asset is approximately 50 years. We do build these assets for other developers, we build these assets for design standards, which are longer than 35 years.
Okay. There won't be any value except scrap value, because after 35 years, residual life will be 10-15 years only. That is what we are trying to say.
Either you will get cash collection for 15 years of new tariff, which you will get. The second is, while the world looks, I would say, minimal or bad, I would urge you to do the calculation on the metal price. It'll be a significant scrap value.
Okay. Is there any precedent in the developed countries where these 30- 35 years have been run down and what has happened to those trusts? Can you elaborate on this?
I think every country is different based on regulation. I would just say that it works on what is the need of the hour for the country or regulator at that point in time. We believe energy highways are very important and maybe they will be continued to be used as energy highways, and we will continue to get paid tariff. That's a simpler way to look at it. The scrap is a concept to take you to the extreme and say, "Okay, if transmission is not required, what is the value? If transmission is required, then you will continue to get paid.
Okay, sir. It was very helpful. I have some queries. I'll address it to your Investor Relations Department. Thank you very much, sir. All the best for the future.
Sure. Thank you.
Thank you very much. Next question is from Pradyumna Dalmia from Landstone Investments. Please go ahead.
Hi there. Good evening, Harsh, and thanks for all your clarifications thus far. I just have a few questions. Number one on this transfer agreement between Esoteric and Sterlite expiring. Can you share the price at which this transaction was supposed to have happened, and was that a price that was fixed?
Yeah. This was a public announcement, and the price was fixed. This was to be transacted at INR 83.89 a unit, and this price was fixed for the contract period or till the long stop date.
Okay. That may, I guess, be one of the reasons why because obviously the price has significantly increased, so that could be one of the considerations. Anyway. My next question is on our borrowing and factoring. Can you please share your average borrowing rate at the moment?
It's there in our investor presentation. Our weighted average cost of borrowing today is 8.6%.
Okay.
Yeah.
8.6%. Can you talk a little bit more about this factoring thing, and what are the entities and how have you done this factoring? Is it through banks, the NBFCs or other financial institutions, et cetera?
We have done it through banks, and we have done it through for two legal entities called JTCL and NRSS, which are our subsidiaries. The amount of value factoring we have done is about INR 140 crores.
Okay. This is being done entirely through banks?
Yeah. Correct.
Okay, great. My last question. As one of our objective is ultimately the growth in the NDCF. As the NDCF rises and grows over the years, then isn't it logical that the DPU should also increase and follow that growth? So far we have maintained a very constant DPU of INR 3 per unit ever since inception. As the NDCF grows, shouldn't the DPU also grow in some manner?
No, it's a very valid question, and I think once NDCF will grow, we will look to grow DPU. This year, we'll have to see. Just to give you a math, INR 3 a DPU on our investor base is approximately INR 700 crore of NDCF. That's what is required for IndiGrid to be able to pay that. We acquired last year the assets mid-quarter, and therefore, we distributed what we earned. This year, COVID has come, we would like to wait and watch and see where we end the year in terms of NDCF to be able to repay.
To be able to pay higher amount. In any case, SEBI has put in a clear guideline that we have to anyway distribute minimum 90%. In any case, beyond the point that NDCF increases substantially, DPU increase will have to happen.
Okay. Understood. Just again, last question again on this 15% Sterlite stake. You said there is at present no indication as to whether they are going to retain the stake or sell it, or whether there are any other institutions who might be in the fray of acquiring this stake from them.
Correct. It's not for me to answer on behalf of Sterlite. It is completely their decision on that.
as and when there will be any disclosures, then either Sterlite as well as your management.
Yeah, that is a compliance requirement, so we'll have to do it.
Okay. Great, Harsh. Thank you so much.
Thank you.
Thank you very much. Next question is from Devam Mody from Redico. Please go ahead.
Yeah. Hi, Harsh. Thanks for taking my question.
Hi.
We are currently at around 50% net debt to AUM. I understand that we can probably take it higher up to, let's say, around 70%. Are there any rating challenges which would be there, because of which we would have to cap it at a particular threshold, and we would probably need to raise capital at that point of time?
At the moment, the way our business plan is structured is that we have taken rating rationales. Rather, it is called advanced rating rationale, that if we buy assets, all the framework assets which will take us up to approximately 68%, 67%. In that scenario, we would remain AAA. Having said so, all ratings are valid, and they're skewed when we borrow, right.
Today's ratings are taking into account today's debt and potential future debt, which is about 68%. As and when we raise that debt, the rating agency will make a revised assessment, looking at several factors. I cannot forecast what is going to be the rating. However, I can say that today's rating already accounts into a business plan of acquiring the framework assets.
Sure. Next was that if, let's say because of whatever development, let's say the IndiGrid unit price drops and the yield IRR rises to a particular level which is attractive from our perspective, would there be a case for a buyback and what would be the corpus available for such a buyback? If at all, what is the key regulations that are applicable to us for the same?
Okay. At the moment, buyback regulations are not public or not announced by SEBI. I can't comment on that. At the moment, there is no way we can do a buyback.
Okay. The other thing was that you mentioned in your presentation that there are eight yield platforms. You have eight Asian yield platforms and that you would like to be probably among the most admired vehicles.
You have mentioned some of the eight platforms in your presentation, and that you would want to be one of the most admired vehicles. Right now, if you see, you are trading at the highest yield and obviously we have some way to go in terms of five. What are the top three to five factors in your view that would be key to achieving this? Any particular platform that you feel is aspirational or that you would like to compare yourself to in Asia in going ahead?
I won't say any particular platform, but I would definitely address what are the key factors probably which may help us. One of them is investor awareness. Therefore, it is extremely important, and we spend disproportionate time and effort to explain our business. We recognize that InvITs are new and it's just three years of existence and track record. We go a little bit extra and explain investors what do we stand for, what is our business, and help people understand better. That one clearly is there.
Second is the examples are from mature markets, right? Today, InvIT as a market itself is very nascent in India. It's been three years. We believe that with the track record, it would naturally also become comparable. I would say the third one is if we can continue to grow and become a larger size. I would say these three items are important besides the fact that we deliver our results and performance as planned for.
Okay, sure. Finally, from what we can know, there are a couple of decent chunks of acquisitions still remaining from SPGVL to be done. Given the current situation that has developed, would there be any concerns surrounding these acquisitions that are in the pipeline?
See, there is a framework agreement signed. It's not with KKR and Sterlite Power, it's between IndiGrid and Sterlite Power. Those framework agreements are there to provide sufficient clarity and both parties have its rights and obligations under that. Both the firms are professional firms. We would look to work on the line of those agreements and give it effect.
Correct. Finally, just one last thing, we understand that right now we are not having debt repayments to be done as a part of our cash flow because of the current structuring. Going ahead, let's say we have a gross debt of around INR 6,800 odd crores.
If we normalize the right now interest payments also we are probably paying a little less because of some of the structures of the MLDs and all. We have to normalize all the interest and debt payments. How do we continue to ensure the current DPU? Would it mean that probably you will take more debt or refinance more debt at a particular level if you don't add any more assets?
Okay. There are two, three questions that you asked, so let me try to address that in a simple manner. Will we refinance debt? Yes, we will refinance debt to ensure the tenors are pushed ahead and longer. Can we refinance debt or rather can we take more leverage and distribute to investors? Right. It's a simple question that can we tomorrow raise INR 500 crore debt and pay DPU? We cannot pay that.
As per regulations, if our leverage is more than 49%, we cannot lever more to just pay DPU. Right. That is a natural protection or rather natural regulation around that. We can only pay effectively DPU from the cash that we have earned.
Okay. Okay, sure. That's it from my side. Thanks.
Thank you.
Thank you very much. Next question is from Sunil Shah from Turtle Star Portfolio Managers. Please go ahead.
Yeah. Yeah. A commendable performance from the entire team of IndiGrid. Thank you very much for doing a great job in such times. Sir, I'm just doing a follow-up on the previous question as well. In terms of the three framework assets, GPTL and KTL NER. Sir, is the valuation in place, meaning, the acquisition price at which we'll be acquiring those assets, which will take us from INR 12,000 crore- INR 18,000 crore, is it in place or it's going to be perfect and we are not sure about our acquisition price as well right now?
No. I think if you look at our disclosures last year when we did in May 2019, it included the disclosures around the base value on which we have decided to transact.
There will be adjustment both upwards and downwards with respect to several critical factors, including interest rate or any other diligence findings. The base value on which we assigned the framework agreement is captured and disclosed also.
Okay. Any upward or downward revision of price would also be driven on a formula base. It wouldn't be a subjective valuation from the seller's side, right? That's the only clarification I wanted to seek.
Okay. See, we have tried to capture in the framework agreement whatever can be done with a formula, right?
Let's say, if a diligence finding cannot be addressed in a formula, right? That is something which we'll have to take case by case. Whatever the number up or down is, we endeavor to address it before we come for EGM approval, right? We try to capture the updates in the approval of investors. We do release even for framework asset and EGM notice for investors to vote for. Right?
Okay.
Therefore, that is the closure date of any final adjustment also that gets disclosed, both upward or downward.
Fair enough. Sir, this acquisition will take us to INR 18,000 crore of AUM, correct?
Yeah.
Yeah. Just one more point. Hypothetically, assuming the assets are acquired, then our previous guideline or the guidance that was there that we retain the DPU of INR 12 for a 8-10 year period, barring the coming quarter, long-term sustains because if the acquisition happens, then, at INR 18,000 crore also we are reasonably certain about INR 12 DPU for the eight-year period. Is that correct?
That's correct.
That's correct.
Yeah, that is what we had guided last year. Again, you need to factor in the event like COVID if it happens. Obviously year on year, quarter on quarter, there can be changes because of such black swan events. Other than that, directionally, you are correct.
Yeah. Fine. Thank you very much, and congratulations for a super job. Thanks so much, sir.
Thank you. Thank you.
Thank you very much. Next question is from Sudhir Behera from Right Time Consultancy. Please go ahead.
Yeah. Thank you, sir, for taking my question. Sir, SEBI with the guideline of giving the exit option to the investor. Can you throw some light on that? Hello?
Yeah, I understand that.
That is number one. Second question, see, we are just growing our size, and everything is growing except the DPU. Barring this COVID situation, assume that things will be normal in the next, say, one or two quarters. What are the chances of growth in the DPU itself? As an investor, we are looking for that. These are the two questions, sir.
I think to answer your second question first, right, it's a very forward-looking statement, assuming things will be okay. I think we'll need to wait for that time, right? Today, we are in an uncertain environment, therefore I think it is not appropriate for us to give a comment that things will be okay and what will happen if things are okay. We'll have to wait and watch how things improve over the next two quarters. If it does, then we'll be in a better position to provide our guidance at that point in time.
No, sir. See, my point is whether when we are growing our business, whether these things are in mind to grow the DPU. That is the thing.
Okay. To answer your question simply, if as we grow our AUM, if our NDCF grows, which will grow, then DPU will grow. We'll have to factor in events like this, and if there is uncertainty, if asset acquisition is delayed or if working capital cycles are extended on account of even COVID-like scenarios.
Mm-hmm. Correct.
In that scenario, there can be impact on the DPU. Okay?
The first question that you asked
SEBI's guideline for exit option to the investor.
Correct. I think first is, it's a liquid trading instrument, so if at all retail investors want to sell, they can sell on the exchange as well. Besides that, the exit option is only applicable when there is a incoming sponsor or somebody crossing 25% units, they have taken investor approval and have not been able to garner 75% of the investor approval.
Only in that scenario, investors have been offered an exit option. If the incoming investor or sponsor is able to garner sufficient votes, then there is no exit option. In any case, this is listed for retail investors, so in case they want to sell, they can probably sell it on the exchange anytime.
Sir, congratulations, and you are really doing good work, sir. Congrats.
Thank you.
Thank you very much. Next question is from Sunil Kothari of Unique Asset Management. Please go ahead.
Hi. Good evening, Harsh, and congratulations on the performance. Harsh, my first question on the permission which KKR had to receive to become a sponsor from the SEBI. Have they received this, even, say, post July 15th?
Sorry, can you repeat that? I'm sorry.
KKR, when they acquired this stake, it was mentioned that they also need to get permission from SEBI to become a co-sponsor along with Sterlite. That was also a prerequisite for them to take their stake up from 23%- 37% or 38%. Have they received this permission from SEBI?
See, SEBI published a guideline of how somebody can become a sponsor in July. I won't say there is a permission provided by SEBI and not provided by SEBI. There is a process that SEBI has clarified in July 2020. Anyone, not KKR, anyone who wants to become a sponsor will have to follow that process. There is no one-shot approval that is required from SEBI.
There is a process to be followed, and which means that they need to take approval of approximately 75% investors. If they can't achieve that and still want to become sponsor, they need to provide exit to the declining unit holders. There is a process which is laid down by SEBI.
Okay. One of the requirements there also mentions that they need to have more than 25% stake, correct?
No. The requirement is not to have more than 25%. If one wants to cross 25%, one needs to do it. You can try to become a sponsor even if you are not crossing 25%. Again, I'm just reiterating regulations.
Fair enough. Why the removal of intent from KKR's side to not become a sponsor anymore? Earlier it was dependent on SEBI's regulation, et cetera. Now that it is received, KKR is not dependent on acquiring this additional 15% stake to become a sponsor. They can become a sponsor right now based on whatever holding that they have. Why this change in intent from KKR?
Yeah. I would say, see, all these transactions were linked in May 2019, right? KKR applied or expressed their interest of becoming a sponsor, and they also signed the agreement to acquire 15%. To give effect to acquisition of 15%, they would have to become a sponsor, right? If the 15% transaction is not happening, in that scenario, it is KKR's choice. It's not a requirement of SEBI that you need to become sponsor to acquire that. Therefore they have exercised that choice. Now, can they do it? Technically, yes. Why did they not do it? I cannot answer on their behalf.
No, fair enough. I respect that. It's fine. Harsh, my second question on the interest cost that we have. Since, I think two years back, since we came into the market, I think our average cost of funds has been in the similar range. Whereas the yield has gone down. Today in the RBI policy meeting, the governor also said that the differential between a AAA-rated corporate yield and G-sec has gone down from 250 basis points to 50 odd basis points.
For us, the differential in yield has rather gone up from maybe 100-150 basis points to about 250-300 basis points right now. Given that our loans will also be asset-backed. Any scope of improvement and why the yield differential has gone up?
See, a year back or two years back, people used to ask that interest rate can go up and down. Do we hedge our interest rate risk? We used to say that, yes, we have fixed our interest cost. A substantial portion of our portfolio has got fixed interest cost because we lock in interest rates as we acquire projects. Starting from three years to five years to 10 years, different range and different transactions.
When you lock in an interest rate, when you acquire a project, after that, interest rate can go down or it can go up, right? Assuming that interest rates are going down right now, you are seeing a higher spread. Our business is not of speculating on interest cost going up and down and creating that much extra return.
We see interest cost as a risk, therefore, we need to try to mitigate that risk by managing it. Therefore, as and when we have got ability and chance to hedge this risk for longer, we have tried to fix our interest cost. Now, if after such fixation, if interest rates have gone down, I don't think we as management team look at it as an opportunity lost because it could have gone up as well. It is extremely difficult or challenging for somebody to predict and take decisions on that basis on a fixed revenue kind of business, right? We would like to hedge our interest cost most of the time.
Thank you very much. The line for the participant dropped. We move on to the next participant. Before we do that, due to time constraint, we request all the participants to restrict to one question per participant. Next question is from Ravi Chandra, an individual investor. Please go ahead.
Yeah. Good evening, Harsh. It's an excellent presentation. I think maybe I'm last, or last but one, to ask one simple question. The slide number 12. It might take some time to go to slide number 12.
Yeah.
Yeah. In the slide number 12, I can see there are two reserves. One is you are telling that it is at SP level. Basically, you answered that question. This 288 is for the fluctuation in collection. There is one more reserve at IGT itself.
Yeah.
At the right most. Could you please explain once again about the second reserve, IndiGrid, 162 lakhs.
I would first explain the SEBI regulations. SEBI regulations require us to distribute 90% from SPV to InvIT. InvIT to investors, we need to have another 90% distribution. Minimum. These are the minimum requirements. We have ability to create reserves at both SPV and at InvIT level, depending on the cash flows that get accrued at both entities.
For example, to simply explain this, we could create a reserve of INR 28.8 crores at SPV level and still remained compliant by distributing 90% of DPU from SPV to InvIT. After that, we could create reserve of INR 16 crores at IndiGrid and pay INR 175 crores. SEBI regulations provide us the ability to create reserves at both level. Again, these are not accounting reserves.
These are just cash reserves, which are the 10% of the NDCF that company can retain for either growth of a further volatility. Right? At both levels, there is ability to do approximately 10%. Does that address your question?
The line for the participant dropped.
That's fine.
We will call the next participant. Next question is from Sharad S. from Avendus Capital Private Limited. Please go ahead.
Hi. Thanks for the excellent presentation. Just want to understand, because of the new regulation or new tax changes which has happened where dividend is tax-free at the hands of investors while interest is, are you looking at changing the way cash flows work? Not immediately, but maybe in a couple of years or three years kind of timeframe.
Sorry, can you repeat that question? I missed that, sir.
In terms of distribution, currently the distribution entirely is interest. Whereas, the tax favorability is towards dividend. Are we working towards some of these cash flow coming to the investors, unitholders, being more dividend and less of interest?
Okay. I think we look at the overall tax liability on the, starting from SPV to investor on a full basis. Okay. We believe that even if you look at as a dividend-paying platform, we'll have to pay a corporate tax at the SPV to create profitable reserves and then pay dividend out of that.
If we go for a new tax regime, okay, the dividends will also be taxable in the hands of investors, right? At a marginal rate. With the new tax regime, the distinction between dividend and interest are actually completely narrowed for most investors. I won't say for all. Dividends are taxable at a normal rate. To go back to the old tax regime will be a substantial tax loss at the SPV level itself.
I think what we attempt to do is that if we earn INR 100, we try to maximize what can reach investors on a post-tax basis from InvIT. After that, different investors have got different tax treatments, right. Therefore, we believe at this moment, what we are doing is focusing on distributing maximum as interest, which based on our shareholding mix today, seems to be the most optimal thing to do. Considering the new tax rule where the dividends are also taxable, that's something which we don't see in the foreseeable future to be followed by InvIT.
Okay. Thank you. Just want to understand, what are the risks from the receivables side? Is it the state electricity boards or is it something else?
Sorry, Who are the receivables from?
Yeah. Which are the receivables from, which are under risk for us?
Okay. I can't give you which are the specific receivable and the risk from us, but our customers include state distribution companies, private distribution companies, state GenCos, private GenCos. It's a mix of customers.
Okay. Thank you very much.
Thank you very much. A request to all the participants, please restrict to one question per participant. Next question is from Neeraj Shah from Dalal & Broacha. Please go ahead.
Hi, sir. Congratulations on the results. I'd like to understand one part in the portfolio that we have going ahead. From my understanding, we have three different assets to be acquired, and one is under share purchase agreement. That is JTPL, right?
No, Jhajjar has already been acquired. Sorry, sir. We have three assets or framework assets to be acquired from Sterlite Power, GPTL, NER-II, and KTL.
Okay. For these, the capital raising is not done. That will happen in the future after we monitor the asset construction, right?
Yeah. The equity capital that is required to be able to remain within the leverage ratio has been raised. The debt capital will be raised as and when we look to complete the acquisition.
Okay. Any timeline on these acquisitions?
No, I think that is dependent on the completion of the assets. As and when they come to completion, there is a process mentioned in the framework agreement. We diligence them, we follow the framework agreement and make the proposal an offer, and then we go to acquire that. The process starts when the asset is completed.
Okay, sir. Sir, this JKTPL is the asset that has been recently acquired, right?
We have signed the SPA for that, but we require approval from the regulator. We are awaiting that approval.
The capital raising for that is done through debt?
Yes, this will be a debt-acquired asset. We have not raised the debt yet. As and when the regulatory approval comes in, we'll look to acquire.
Basically there are four assets in line. That is JKTPL, GPTL, and the NRSS and KTL, right?
Correct.
Okay, sir. That's it. Thanks a lot. Thank you so much.
Thank you.
Thank you very much. Next question is from Sanjay Gupta, an individual investor. Please go ahead.
Thank you for taking my question. My question is more on the operational side. Whenever these receivables are overdue, is there a rate of interest that they pay for the overdue, or it is part of the price, they don't pay for the overdue interest?
They do pay late payment surcharge. The late payment surcharge is approximately 18%. Per month, about 1.5 % if they pay after the due date, which is 45 days.
Okay.
During the COVID time till June 30th, that late payment surcharge was reduced from 18% to 12%. Okay.
Okay.
That was also one of the reasons that people chose to not pay, because it was a lesser late payment surcharge.
Yes.
We believe post July 31st, it is a new late payment surcharge at 18% that is being levied, and therefore there is a substantial deterrence to delay.
Some amount of delay is healthy for bottom- line, some amount of delay.
I won't say that because [crosstalk] --
Liquidity.
--late payment surcharge. No, late payment surcharges are not easily recoverable, right?
Oh, okay.
Therefore, we recognize only on cash basis.
Okay, fine. Next question which I have, a small question is on this. If there are delays and all, is there no right in the agreement to just stop the electricity flow?
That's an extreme way of putting it. There is a regulation called Regulation of Power Supply, which expresses the procedures to be followed in case a transmission licensee is not paid. It is not as simple as that, we turn off the switch. It needs to go through procedures with regulators and load dispatch centers. Yeah.
Okay. Thank you very much.
Yeah. Thank you.
Thank you very much. Ladies and gentlemen, that was our last question for today. I will now hand the conference over to Mr. Swarnim Maheshwari for closing comments.
Right. Thank you so much, Harsh. Would you have any closing comments over here?
Yeah, thank you, Swarnim. I think the closing comments remains, I think we are focused on our business. The quarter one was a challenging quarter considering the COVID scenario, both from operations, health, and safety and collections. I think we are happy that we have been able to maintain our portfolio assets at a higher availability and addressed the O&M requirement as and when it arises during the COVID scenario as well. We are also happy about our robust business model that our revenue remains intact. This was the first time when the collections went so low in this quarter.
We were pretty confident that we have a strong balance sheet, and we started the COVID scenario with a strong cash cushion with us, and therefore we could survive and keep the balance sheet strong. In addition to that, we also did factoring to ensure that our track record that we have built by paying INR 3 per unit DPU continues, and our investors earn the expected yield out of that.
I think overall it was an eventful quarter from markets and company, both perspectives. We look forward to continue to do the same and hope that overall COVID situation improves in the country, and wishing everybody safety on that.
Bye, Harsh. Thank you so much and wish you all the best.
Thank you. Thank you very much.