IRB Infrastructure Developers | In 2020 so far, the share price has moved up 76 percent to Rs 131.20. It's trailing twelve months (TTM) P/E was 6.40 multiple while 5-year average P/E was 8.30 multiple.
When it comes to investment options, the more the merrier. Initially it may cause some confusion, but once you get a hang of it, you have one more dish if it suits your palate. Infrastructure Investment Trusts (InvITs) are one such new avenue. SEBI issued InvIT guidelines way back in September 2014, but the first product hit the market now, in May 2017. Real Estate Investment Trusts (REITs) are yet to take off.
An InvITs is a pool of money for investing in infrastructure projects and distribution of the earnings to the unit holders. An InvIT issues units that are listed at the Stock Exchange. In that sense, InvITs are like exchange traded funds (ETFs) of mutual funds. The difference is, in a mutual fund, the underlying portfolio of shares or bonds change in value every day and there is an NAV declared every day. An InvIT invests in the projects which are identified as special purpose vehicles (SPVs) that are not valued everyday but once in six months for publicly offered InvITs. Both InvITs and mutual funds are regulated by SEBI.
InvITs are set up as a trust and registered with SEBI. An InvIT involves four entities: Trustee, Sponsor, Investment Manager and Project Manager. The trustee, who oversees the role of an InvIT, is a SEBI registered debenture trustee and he cannot be an associate of the Sponsor or Manager. ‘Sponsor’ means promoters and refers to any company or body corporate with a net worth of Rs. 100 crore which sets up the InvIT and is designated as such while applying to SEBI. Promoters or Sponsor, collectively, have to hold at least 25 percent in the InvIT for minimum three years. Value of the assets owned/proposed to be owned by InvIT shall be at least Rs 500 crore. Minimum issue size for initial offer is Rs 250 crore. InvITs are allowed to add projects in the same vehicle in future so that investors can benefit from diversification as well as growth in their portfolio.
Given the challenging phase of infrastructure in the country today, InvITs may provide an alternate source of funds. Several existing infrastructure projects which are under development in India are delayed and ‘stressed’ on account of varied reasons like increasing debt finance costs, lack of international finance flowing to Indian infrastructure projects, project implementation delays caused by various factors like global economic slowdown, cost overruns, etc. InvITs may offer a source of long-term re-finance for existing infrastructure projects. InvITs may help in attracting international finance into Indian infrastructure sector. These would also enable the investors to hold a diversified portfolio of infrastructure assets.
The first InvIT in India, floated by IRB, which specialises in road assets, closed its public offer on 5 May ’17 and was subscribed approx 8.5 times i.e. received an enthusiastic response. India Grid Trust (power transmission assets) followed. There are more in the pipeline: MEP Infrastructure (toll assets), Reliance Infrastructure (toll assets) and IL&FS Transportation Networks (road assets).
Rating agency ICRA points out in a report that, led by roads, renewables and transmission sectors, there is a potential for InvIT issuances worth Rs 20,000 crore capital over the next 12-18 months. CRISIL states that InvITs are innovative new vehicles that can play a crucial role in meeting India’s huge infrastructure requirements, estimated at Rs 43 trillion over next 5 years. An InvIT can invest in infrastructure projects or a company with at least 90% of its assets comprising infrastructure projects. These would include projects for roads and bridges, ports, airports, metros, electricity generation / transmission, telecommunication services, oil pipelines, irrigation, etc.
Among Asian markets, Singapore is a success story for listed Trusts. In Singapore, there are 39 listings with a market capitalisation of approx USD 70 billion, but the bias is on REITs than on InvITs. Over a period of time, India may go the Singapore way, but the initial experience of investors from REITs and/or InvITs, from the one InvIT getting listed and others in the pipeline, should be sanguine.
There is a debate on whether an InvIT, by nature of investment, is equity or debt as it has features of both. It is somewhere in between; loosely, debt-plus or equity-minus in terms of risk return profile. The equity-like features are that the units are listed, can change hands like equity stocks, there is periodic valuation of the projects akin to periodic results of companies and economic factors like higher GDP growth or higher inflation would lead to expectation of higher revenue and hence higher price of the units at the Exchange.
The debt-like feature is there is periodic pay-out of the earnings of the InvIT from the underlying SPVs, which is not exactly like contractual coupon pay-out on bonds but somewhat comparable as the valuation gives a perspective on how much to expect. It is a hybrid instrument with a somewhat predictable cash flow yield (akin to debt) and potential appreciation with growth of the economy (akin to equity).
Taxation wise, an InvITs is a pass-through vehicle. There is a mandate to distribute at least 90 percent of net-distributable cash flows. Interest component of income distributed by trust to the unit holders would attract withholding tax @ 10 percent for resident unit holders. Interest income is taxable in the hands of the unit holder. Dividend income is exempt in the hands of the unit holder and there is no dividend distribution tax.
At this point of time, InvIT is not a retail product, the minimum primary application amount being Rs 10 lakh and the minimum secondary transaction amount being Rs 5 lakh. The restriction is imposed because there is no track record and lack of awareness. The major risk factor, as we understand from the IRB offer, is reduction in traffic, but there is a risk mitigant in the form of concession agreement and compensation payment in case of termination of contract.
There is a liquidity risk as well, in the secondary market the units may not be traded every day as the investor base is not wide at this point of time. May be over a period of time, with the development of this market, SEBI would look to easing the threshold amount for REITs and InvITs. As of now, investors should keep it on the radar and participate through the mutual fund route, who have a better understanding of the risk factors and can handle secondary market liquidity issues.Author is an independent financial advisor.