Foreign investors have good appetite for InvITs, says India Inc

With private equity player KKR becoming a co-sponsor in the India Grid Trust InvIT (infrastructure investment trust) over the weekend, Reliance Jio transferring fibre and telecom assets to two InvITs, and Brookfield’s India Infrastructure Trust investing in a gas pipeline, this specialised investment vehicle is in the spotlight. 

InvITs, first allowed in 2016, are seen as good option for infra firms to hive off specified assets into a special purpose vehicle, which will get the benefits of owning the asset. External investors put money in these InvITs for steady returns. The recent interest from foreign investors augurs well for the product.

Since market regulator Securities and Exchange Board of India (Sebi) allowed the product, four InvITs have started operations, with two having gone public. There are a few more in the offing, with most of these looking at a private route and expected to target the patient long-term foreign investor. IRB Infrastructure Developers’ IRB InvIT Fund, Sterlite Power’s India Grid are the two listed ones. L&T Infrastructure Development Projects’ (IDPL’s) IndInfravit Trust and Brookfield’s India Infrastructure Trust are privately held.

“Our InvIT’s investment approach was validated in February, with Canada’s Omers investing 22 per cent,” said Shailesh Pathak, chief executive, L&T IDPL. The Canadian pension fund had bought the stake for Rs 870 crore.

On May 4, India Grid announced closing of a preference unit issue where KKR invested Rs 1,084 crore and applied to become a sponsor. The latter plans to acquire an additional 15 per cent from Sterlite Power, the main sponsor. In a separate transaction, KKR will additionally acquire a majority shareholding in Sterlite Investment Managers, the investment manager owned by Sterlite Power. With the capital infusion, India Grid will purchase five electricity transmission assets worth Rs 11,500 crore from Sterlite Power. “India holds a tremendous opportunity for infrastructure investment, in trillions of dollars in the coming decades,” said Sanjay Nayar, chief executive at KKR India. 

Sebi reduced the minimum subscription limit for InvITs from Rs 10 lakh to Rs 1 lakh last month, and increased the leverage limit from 49 per cent to 70 per cent. “Foreign firms coming in as co-sponsors will help attract more investor interest. Investors prefer when the sponsor and first owner of the assets are different. With the new Sebi regulations, there would be more scope for InvITs coming in. With more foreign firms having their skin in the game, it would be a natural evolution for infrastructure and its financing,” said Nitin Bhasin, head of research at Ambit Capital. 

Sector officials say foreign investment firms have large appetite for InvITs. “For an InvIT with cash-flow yielding assets, the right set of investors is important. Patient long-term capital, such as global pension funds looking for stable cash flow return, is the right investor profile,” Pathak said.

 
Officials add investors are now comfortable with the instrument, as these have been around for nearly two years. “There is a track record now on how the platform works, how the management works and a dividend history,” said an official with one of the InvITs, who did not wish to be named.

The price performance for the listed InvITs, however, fails to impress. They continue to trade below issue price, though yields are attractive — the current yield on India Grid is 14.5 per cent.

Between August 2017 and April 2019, India Grid distributed Rs 611 crore. IRB InvIT distributed Rs 612 crore in FY18 and Rs 711 crore in FY19. People in the know say the yield for L&T IDPL’s InvIT is higher than the listed ones. 

Experts say future InvITs will prefer the private listing route, while real estate investment trusts may attract more interest from small investors. 

Mutual funds’ interest in InvITs has been modest. According to Value Research, three funds have less than Rs 50 crore combined in India Grid and 10 funds hold a little more than Rs 400 crore in IRB InvIT.

With more companies exploring the InvIT route, the nature of assets on offer could change. Jio has transferred around 700,000 route km of fibre and 175,000 built and under-development towers into two separate InvITs — one for towers and one for the fibre assets. Currently, Jio is anchor tenant for the towers, as well as 50 per cent of the fibre pairs, to use these assets for 20 years. The partially utilised assets set themselves apart from those currently part of the three operational InvITs. They either consist of road projects which have concession agreements or transmission assets where the offtake customer is established.

The Reliance InvITs would bank on Jio’s strong growth and future infrastructure demand. “Investors will be factoring for Jio’s growth and, hence, expected business for the towers,” said an expert, who did not wish to be named. 

Analysts do not expect it to be easy for the InvIT to find new tenants. “It is crucial for these InvITs to generate revenue from other customers. However, that is not going to be easy, given that its telecom rivals, Vodafone Idea and Bharti Airtel, already have contracts with Bharti Infratel. On top of these, the two sick PSU telcos, BSNL and MTNL, also have towers and fibre assets that they might look to monetise eventually,” said a Mumbai-based analyst.




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