Apr 19, 2017 08:58 AM IST | Source:

Is InvIT really a boon for IRB Infrastructure's shareholders?

Through InvIT, IRB is looking to offer six road projects having total capital employed of about Rs 5800-6000 crore out of the total 14 operational road assets employing close to Rs 16000 crore of capital.

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Shareholders of IRB Infrastructure breathed a sigh of relief after SEBI gave its nod to the much-awaited IPO of IRB InvIT Fund. Since there were widespread apprehensions, the clearance was cheered with the stock rallying 7.8 percent.

How does InvIT help IRB and what financial benefit does it bring to the company or the shareholders?

InvIT is an instrument where an infrastructure company or a developer can bundle some of its existing assets (it can be road, port, power or others), transfer it to a trust, which in turn will issue units (InvITs) to the subscriber who may be a retail investor, institutional investor or someone looking for instruments similar to fixed income instruments. Through this mechanism some of the debt sitting in these assets can be sold or transferred and equity invested in these projects can be unlocked or released.

Through InvIT, IRB is looking to offer six road projects having total capital employed of about Rs 5800-6000 crore out of the total 14 operational road assets employing close to Rs 16000 crore of capital.

The reason why this InvIT assumes importance is because these six road projects employ equity and sub debt of about Rs 2,600 crore and debt of close to Rs 3,300 crore. With this new structure should the debt get transferred to the trust it would bring down overall debt at the parent level.

To put the figures in perspective, IRB has close to Rs 14,000 crore debt in its books and debt-to-equity of close to 2.8 times (FY16 figures). Post the new structure, debt-to-equity is expected to fall to 1.7 times and there will be savings in interest costs. Assuming a rate of interest at 10 percent, a Rs 4,500-5,000 crore reduction in debt means a close to Rs 500 crore of saving in interest cost. In FY16 the company incurred an interest cost of close to Rs 1,063 crore.

Further, the proposed IPO of InvIT comprises afresh issue of shares to raise funds equivalent to Rs 4,300 crore with an option to retain over subscription upto 25%. A large part or 4,300 crore of the proceeds raised through a fresh issue of shares is earmarked for issuing fresh debt to the project SPVs so that they can prepay or make partial repayment of money to its lenders.

This also includes repayment of loan taken by these SPVs from the sponsors (IRB Infrastructure), which essentially means IRB will be able to take back some cash deployed in these projects in the form of loan (typically known as quasi equity or interest free loans).

That apart, IRB is also looking for an offer for sale (amount not known), which means the part of equity invested in these projects by the parent company will be unlocked. The size of offer-for-sale will be determined at the time of final valuations.

However, investors remain concerned about a recent disturbing trend - the fall in traffic growth, which essentially means project IRR (internal rate of return) might come down and lead to erosion in equity valuations. Such reduction might impact equity valuation in the invested projects. For instance, if the market is willing to ascribe (based on the yield on units)  Rs 5,000 crore enterprise value instead of Rs 5900 crore, the value of equity will reduce partly. In that case, the major benefits to IRB would remain only in the form of improvement in the liquidity and reduction in debt.

Nevertheless, unlocking equity value and repayment of interest free loans would enable IRB to raise a significant amount of equity and at the same time reduce its debt. This will improve liquidity and working capital needed for its construction business and enable the company to participate in bidding for new projects. Thus not only from the perspective of current earnings but also from the perspective of future earnings and growth, the InvIT structure should spell good news for IRB shareholders.
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