With every initial public offering (IPO), getting the kind of response it is, the interest in IRB Infrastructure’s infrastructure investment trust (InvIT) issuance appears good. Being the first-of -its-kind IPO has helped generate reasonable investor interest. But it is also expected to deliver reasonable returns and a steady flow of income. Nonetheless, it is important to gauge how an InvIT works to understand if it would suit an investors’ risk profile.
How does an InvIT works?
InvIT is a pool of infrastructure assets which may be related to the road or power sector. In IRB’s case, it is constituted by six road projects which have an average concession period of about 16 years, with two key projects — Surat-Dahisar and Bharuch-Surat with a remaining life of about five years after the listing of the InvIT. A project manager will be appointed to oversee the operations (including toll collections) of road projects, and report to the investment manager who would be remunerated on a fee-based model. IRB Infra, who is the sponsor of the InvIT, remains the ultimate owner of the assets and as and when required could add more assets to the InvIT. As with mutual funds, the InvIT shall be overseen by a trustee, independent of the sponsor.
How IRB benefits
As is with any IPO, InvIT is a value unlocking proposition. The issue size is Rs 5,035 crore, including Rs 4,300 crore of fresh issue, Rs 300 crore of offer for sale and Rs 400 crore of green shoe option. The issue would directly bring down IRB’s debt-equity ratio from 3x to 2x, as debt relating to the projects (about Rs 3,300 crore) will move off its balance sheet. For the transfer of assets, IRB will be holding 15 per cent stake (worth about Rs 900 crore) in the InvIT, and is also likely to get cash worth Rs 1,700 crore, which could be used to further reduce IRB’ debt-equity ratio to 1.8x or for deployment towards funding equity capital for its recently bid projects.
For the nine months of FY17, the InvIT reported a loss of Rs 13 crore, largely due to interest and depreciation costs. With the IPO taking care of debt and the relatively newer projects maturing operationally, analysts peg a net profit of Rs 264-308 crore in FY18-20.
At 1- 1.1x enterprise value, analysts believe that the offer is fairly priced. However, with no precedence, it doesn’t lend to comparison. Analysts at Macquarie feel that lower valuation for the InvIT is because the concept is new in India and investors would be conservative on the first deal. Those at Kotak Institutional Equities say that the post-tax yield to institutional unit holders (investors) may be over 12.5 per cent. Individuals can expect a decent 10 per cent post-tax yield assuming 30 per cent tax slab. This yield may be paid as dividend and/or may also include buy back of units. Regulations require distribution of at least 90 per cent of the net distributable cash flow to unit holders, who can thus expect steady flow of income.
Road projects are susceptible to climatic seasonality. Extended monsoons usually impact traffic growth and in turn revenues. Increase in inflation can also affect operating costs of the roads. India also has a history of toll concessions being prematurely terminated. Compensation for the same is seldom on time, which may hurt financials.
Investors should note that the value of their units will also depend on the performance of underlying assets, which can be influenced by a host of factors. For instance, a higher than expected traffic growth could lead to better revenues and thus higher profits, and vice-versa. This is important as apart from two aforesaid projects, four others are relatively new where traffic growth isn't established. These four projects currently account for 35 per cent the InvIT's revenues and about half of total road length (1,811 kilometres out of 3,635 kilometres).
Who should invest?
InvITs usually find preference among institutional investors such as mutual funds, banks and insurance companies given that these products allow them better participation in the underlying asset, and given the minimum lot size. They also have deep pockets to balance the aforesaid risks. While it could also suit high net worth individuals, it is certainly not for the retail investor.
Harsh Roongta, CEO, ApnaPaisa.com says that it would be best to see how such an instrument pans out and then participate in such offers. “Even within the IRB InvIT, there are few projects. Therefore it’s not meant for retail investors as yet. Liquidity could also be an issue if a retail investor wants easy exit. I would wait and watch,” he spells out.