Risky road to Inv-IT

The long wait for the rollout of Investment Trust (InvIT) is finally over. IRB Infrastructure Developers (IRB) is the first to raise ₹4,650 crore through this route, which will be available for investors with a minimum subscription of ₹10 lakh.

Put simply, InvITs are trusts into which the sponsor, in this case IRB, transfers certain revenue-generating infrastructure assets (at least 80 per cent).

Units in these trusts can be purchased by the public and the revenue generated from the assets is distributed to the unit-holder. The trust can also invest in equity or lend to other infrastructure projects.

The assets of the project acquired by the sponsors will be looked after by an investment manager (IM), who usually has strong expertise and experience in the projects under consideration. The role of the trustee — like that of any other trustee — is to ensure that the operations and management of the projects are in the best interest of the investors.

In the upcoming InvIT initial public offering, IRB will transfer six of its projects to the trust.

The sponsor expects to raise ₹4,300 crore through a fresh offering and another ₹350 crore via an offer-for-sale. According to data provided by IRB, sponsor holding is well above the minimum 15 per cent threshold mandated by the regulator for the initial three years.

Investors who don’t subscribe to the primary offer can buy units from the secondary market, where the minimum trading lot is ₹5 lakh. The issue will be open during May 3-5, both on the BSE and the NSE.

The funds raised through this issue will be used to repay the entire debt of about ₹3,300 crore on the books of these six projects. This is expected to improve the cash flows and soundness of the balance sheet, since financial costs will come down in the process.

What about the returns one can expect from investing in InvITs? Our estimates based on the traffic estimates projected over the years, put the potential yield for investors of between 11 per cent and 13 per cent per annum. However, there are risks associated with such projects and investors should be aware of them.

So, how different are Inv-ITs compared to traditional projects? The risks for a project can arise from delays in construction, revenue collection and other political and project-related issues.

In case of road projects, the risks arise during the pre-construction and construction stages. While pre-construction risks pertain to identification of economically-viable projects and related clearances, construction risks relate to design changes and unexpected escalation in raw material prices.

Moreover, post-construction, the extent to which the projected toll revenue materialises and how tactfully the initial years of low cash flow and high interest payments are managed are crucial. However, a lot depends on contract structuring.

For instance, in case the private player receives annuity payment from National Highways Authority of India (NHAI), the Ministry of Road Transport and Highways (MORTH) or other State government body to maintain the road, the revenue risks are negligible. With traffic-related issues largely streamlined, risks arising on account of these are alleviated in this offering.

Tumkur-Chitradurga, Jaipur-Deoli and Talegaon-Amravati projects have matured through the initial phase and are expected to continue with their robust toll collection growth rate of 12-14 per cent over the next five years. The revenue growth from these should stabilise at around 7-8 per cent for 15 years before the contract expires in 2037.

Omallur-Salem-Namakkal project, whose toll commencement began in 2009 and will go up to 2026, should grow at a healthy rate of above 10 per cent over the next few years.

Toll revenues of Surat-Dahisar and Bharuch-Surat, whose 13-year contract is expected to end in 2022, have grown at annualised rates of 12 and 8 per cent, respectively, over the last three years.

Moreover, the open-ended structure of this Inv-IT enables it to capitalise on new projects that suit its mandate. According to SEBI norms, Inv-ITs should invest at least 80 per cent of the value of the assets in revenue-generating infrastructure assets, while the rest can be invested in under-construction projects and securities of infrastructure companies. However, an Inv-IT is not allowed to invest in another Inv-IT. So, though currently Inv-IT is not exposed to construction risk, this can definitely change in case a new under-construction project or securities of infrastructure companies are added to the portfolio.

Also, SEBI mandates 90 per cent of the distributable cash flow be distributed to the unitholders at the end of every six months. Moreover, there is the political risk. For instance, during demonetisation, toll collection stopped for 22 days, severely impacting cash flows.

This InvIT has mature projects in its kitty, with low operational risks and healthy operational assets. India Ratings and Research (Ind-Ra) has assigned the fund a long-term senior debt rating of ‘IND AAA’.

Investors can certainly look at this product as a means of diversification, given that it’s a new product with zero track record.

If you are a high net worth individual, make sure you don’t expose beyond 5 per cent of your portfolio to this product.

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