A new investment option has cropped up on the horizon for Indian investors with IRB InvIT Fund, an infrastructure investment trust, recently filing a draft offer document for its initial public offering to raise an aggregate of Rs 4,300 crore.
The Infrastructure Investment Trusts Regulations, 2014, which provides for registration and regulation of InvITs, was notified by Sebi in September that year. IRB InvIT Fund is the first to have filed its IPO prospectus with Sebi. As this is a new investment option with no precedent in the market for such issues, experts say that investors would be required to understand the concept and carry out due diligence before making investments.
“It is a new mechanism and even we have lots of queries, especially regarding the valuation of the issue. We are waiting for the analyst call with the management to get answers to our queries and investors also need to read about the concept well and understand it before venturing into it,” said the research head at a leading brokerage firm.
He, however, pointed out that if the valuation comes out to be good, then it may turn out to be an investment worth considering. “In this case there is some certainty on revenue and profit growth. Based on revenues for current year, an investor can project future revenue on the basis of annual expected hike in toll tariff and rise in traffic on the highway,” he said.
Infrastructure investment trusts are institutions similar to mutual funds that pool investment from various category of investors and invest them into completed and revenue generating infrastructure projects and thereby creating return for the investor. The capital market regulator notified the Sebi (Infrastructure Investment Trusts) Regulations, 2014 on September 26, 2014, and these trusts are likely to help facilitate investment in the infrastructure sector.
Structured like mutual funds, they have a trustee, sponsor(s), investment manager and project manager. While the trustee (certified by Sebi) has the responsibility of inspecting the performance of an InvIT, sponsor(s) are promoters of the company that set up the InvIT. In case of Public–private partnership (PPP) projects, it refers to the infrastructure developer or a special purpose vehicle holding the concession. While the investment manager is entrusted with the task of supervising the assets and investments of the InvIT, the project manager is responsible for the execution of the project.
IRB InvIT Fund
It is registered as an infrastructure investment trust with Sebi and has been settled by the sponsor: IRB Infrastructure Developers Limited. While the trust is designated to raise resources in accordance with the InvIT Regulations and to make investments, it is also required to make distributions to the unitholders.
While the sponsor has 14 road projects (eight completed) as of June 2016, according to the draft offer document filed with Sebi, the trust primarily intends to own, operate and maintain a portfolio of six toll-road assets across five states — Maharashtra, Gujarat, Rajasthan, Karnataka and Tamil Nadu.
The six project SPVs are owned, operated and maintained toll road assets comprising 3,635 lane kilometres of highways. The projects include Surat–Dahisar project (239 km); Tumkur–Chitradurga Project (114 km); Bharuch–Surat project (65 km); Jaipur–Deoli project (148.77 km); Omalur–Salem–Namakkal project (68.6 km) and Talegaon–Amravati project (66.7 km). The offer document states that the total combined income of all project SPVs for the financial year 2016 stood at Rs 1,003.8 crore.
In line with the InvIT regulations, each project SPV will distribute not less than 90 per cent of net distributable cash flow to the trust in proportion of its holding in each of the project SPV and further not less than 90 per cent of the net distributable cash flow of the trust will get distributed to the unitholders. The unitholders will get the distributions at least once every six month.
Though the trust plans to raise Rs 4,300 crore through the public issue, an estimated amount of Rs 4,200 crore from the net proceeds will be invested in the project SPVs by way of an issue of debt. The Project SPVs, in turn, will utilise the proceeds of such investment towards (a) the partial repayment/prepayment of certain loans/facilities availed by the Project SPVs from their respective senior lenders; (b) the prepayment, in part or full, of the subordinate debt provided to such Project SPVs by the sponsor and the project manager and (c) the prepayment, in part or full, of certain unsecured loans and advances availed by such project SPVs from the sponsor, the project manager and certain members of the sponsor group.
Should you go for it?
Experts say that they are waiting for more clarity on the valuation and investors should wait for more clarity to emerge before making up their mind. While Walker Chandiok & Company LLP has put a fair enterprise value of all six SPVs at Rs 7,993 crore, an analyst who is closely following the public issue said that he is awaiting more transparency.
“While the enterprise value is Rs 8,000 crore and bank loans are around Rs 3,650 crore, the equity value stands at around Rs 4,300 crore. But the company also has subordinate debt and we need to see how that is accounted for in the valuation,” said the analyst.
Even as the combined financial statement of the six project SPVs shows a loss of Rs 76 crore in the year ended March 2016, experts say that it had high cash profit during the year and the loss was mostly on account of depreciation and amortisation expense. Also, in case of such projects there is more certainty on revenue growth as one can project the rise in toll tariff and increase in traffic on the highway and that makes it a decent investment option.