In a season that is flooded with IPOs of companies, we have a new infrastructure investment trust (InvIT) hitting the markets. Bharat Highways InvIT has come out with an initial public offering of units to the tune of Rs 2,500 crore. The price band per unit is Rs 98-100. Unlike regular IPOs, this offer does not have a retail quota. So, individual investors would have to compete in the non-institutional portion (25 per cent quota) with HNIs (high net worth individuals) for allotment. But the minimum bidding lot is only 150 units.

Read on for more on the offer and whether you should consider investing your money in it.

How InvITs and their taxation work

InvITs invest in cashflow generating assets and distribute the income made to unitholders in the form of dividends, interest pay-outs and return of capital. In the present Bharat Highways InvIT’s case, the trust has a portfolio of seven highways of around 498 km, from which it would generate regular income from tolling done by the NHAI (National Highways Authority of India). Typically, these assets are held via project SPVs (special purpose vehicles) in which the InvIT holds majority or entire stake.

An InvIT is expected to distribute 90 per cent of its net distributable cashflow to unitholders every six months.

While interest is taxed at the slab rate, dividends are tax-exempt till cumulative payments over the years equal the issue price. Thereafter, dividends are taxed at an investor’s marginal slab rate. Capital repayment would be tax-free. Long-term capital gains (after a holding period of 36 months) from sale of InvITs are taxed at 10 per cent beyond Rs 1 lakh. Short-term capital gains are taxed at 15 per cent. The cost of acquisition would include dividends received.

Healthy portfolio of roads

As mentioned earlier, Bharat Highways InvIT has a portfolio of seven roads. These highways are operated and maintained by project SPVs and the trust gets paid by the NHAI for doing so. All the highways in this issue operate in the HAM mode. In such cases, the winning bidder gets 40 per cent of the project cost from the NHAI during construction. The remaining 60 per cent is to be financed by the bidder itself. Toll is collected by the NHAI. The 60 per cent amount financed is recovered via semi-annual payments from the NHAI.

The seven highways are spread across five states – Punjab, Maharashtra, Gujarat, Andhra Pradesh and Uttar Pradesh.

As of September 2023, these roads have approximate balance periods for receiving payments in the range of 11 years and five months to 13 years 10 months, giving considerable cashflow visibility.

Since the cash inflows follow the terms of the HAM contract payment based on various milestones and clauses, they are not linear and the payment and recognition of key expense heads such as sub-contractor charges and finance costs would determine the profitability in any year. Deferred tax charges could also be a bit uneven over the years.

In that sense, the regular way of analysing companies such as using margins, PE ratios or multiples may not be suited for valuing such InvITs.

In FY22, Bharat Highways InvIT recorded nearly Rs 1,586 crore as revenue from operations and net profit of 62.9 crore. In FY23, the revenue was around Rs 1,510 crore, but net profits soared to Rs 527 crore.

For FY24, FY25 and FY26, the overall InvIT has revenue projections of Rs 678.4 crore, Rs 620.2 crore and Rs 584.6 crore, respectively from the present portfolio of roads alone. Any new additions would increase cashflows.

Similarly, cashflows from operating activities for FY24, FY25 and FY26 are projected to be Rs 1,s005.8 crore, Rs 981.9 crore and Rs 915.2 crore, respectively.

Valuation and investment call

Given that the traditional method of valuing may not be applicable in Bharat Highway InvIT’s case, we consider the enterprise value for taking stock of its worth. The methodology includes taking into account the weighted average cost of capital (WACC). It is assumed at 7.43 per cent by the independent valuer.

The fair enterprise value (EV) of all the seven roads based on their discounted cashflows as of September 2023 is stated as Rs 5,727.3 crore as per independent valuer’s assessment. And the adjusted fair value is Rs 6,342.9 crore, which is the value calculated earlier plus the cash and cash equivalent at the SPV level.

On a post-offer base at the upper end of the price band, the present issue would have a total market value of close to Rs 4,500 crore.

Therefore, the issue is available at a 23-30 per cent discount to the fair EV and adjusted fair value.

Additionally, in a television interaction, the management indicated its view about periodic cash payouts. The implication is that the yields from issue are likely to be a good 300-400 basis point more than the 10-year g-sec’s levels, which means 10-11 per cent on an average.

Thus, from a price discount perspective and with the potential of yield with fairly sound underlying asset quality, investors can subscribe to the issue with a long-term perspective. There are more road assets that Bharat Highways is pursuing to create a wider lucrative portfolio.

The issue would ideally suit HNIs more than retail investors as capital appreciation would be slow in the case of InvITs and hence the yields hold more sway and that requires holding on for long to make significant gains, besides of course, the possibility of uneven cashflows.

The issue proceeds are majorly to pay down a good part of the project SPVs gross debt of Rs 3,528.2 crore.