Bittersweet After Taste

Hyped up InvITs have not performed as expected leaving investors with mixed feelings

Two much-awaited Infrastructure Investment Trust Funds (InvITs) — IRB and IndiGrid — listed with huge fanfare in May and June of 2017. They were tipped to herald a new way for infra companies to monetise their assets and de-leverage their books. 

At the same time, they were also seen as a good investment opportunity for HNIs and institutional investors. However, a year after the launch, the enthusiasm around InvITs has thinned. The shares of IRB InvIT and IndiGrid InvIT have underperformed the Sensex since listing. In the last week of August, IRB InvIT Fund was trading 26% below its issue price of Rs.102 and IndiGrid was 8% below its issue price of Rs.100 (See: Muted performance). 

During the launch, investors had lined up for their share of InvITs and the issues were oversubscribed. But waning investor interest fuelled by deteriorating assets has left investors complaining about their investment. In hindsight, it seems a classic case of investor greed embracing mis-selling with open arms. As the fund was listed as equity and benchmarked to equity indices, investors expected higher return and ended up being disappointed, according to Deepak Jasani, head — retail research, HDFC Securities. Some analysts, though, feel their final return should be judged in the form of dividends, interest and buybacks rather than just on current price. “Although InvITs trade on the stock exchange, their return should not be compared with equity instruments. Extensive investor education is important so that they attract the right investors,” says Amishi Kapadia, senior president and global head of merchant banking, Yes Securities. 

First to market

India’s first InvIT launched last year by toll-road builder IRB Infrastructure Developers, was oversubscribed 8.57x. Despite Sebi mandating a minimum application size of Rs.1 million, non-institutional investors came in droves and oversubscribed 5.89x, with around 60,000 applications from the public. Priced between Rs.100 and Rs.102, the InvIT had also attracted investment from sovereign funds such as the Singapore government. 

However, the deterioration of underlying assets, difficulty in valuation of toll-road projects and adverse regulatory change has made the ride bumpy for IRB InvIT. According to Vijay Agrawal, executive head, Equirus Capital, IRB InvIT was valued based on the assets’ future cash flow. IRB Infra had promised a 12% return, presuming that there would 5.5% traffic growth and Wholesale Price Index (WPI) would remain at 4.5%. But last year, the traffic on most of the routes dropped after implementation of demonetisation and GST. “They predicted that there would 10% revenue growth. But there is no guarantee that the assets incorporated into the fund will grow at 10%. If IRB had valued their InvIT based on current cash flow, it would have been a better valuation methodology,” says Agrawal.     

With factors such as these making it difficult to value road projects of IRB Infra, concerns over whether it will be able to continue doling out 12% return has led to intense selling pressure. Adding to IRB’s woes, its two assets Pathankot-Amritsar and Jaipur-Deoli are witnessing weak traffic revenue after National Green Tribunal (NGT) imposed a sand-mining ban near the highway. IRB InvIT had acquired Pathankot-Amritsar asset by paying Rs.15.50 billion. Since the trust bought it by raising debt equivalent to one-third of the amount it had received from unit holders, the distributable surplus is likely to fall.“Some investors are worried about the cash flow generation by the new projects acquired over the past year,” says Jasani.

However, with the pain of GST and demonetisation gradually receding, analysts say that IRB InvIT might witness relatively better days ahead. “The numbers post-GST, suggest that traffic has stabilised from 3QFY18 and the growth in traffic will sustain going forward. Hence, delivering 9.5% toll revenue growth will not be challenging,” feels Harendra Kumar, managing director, institutional equities, Elara Capital. The management is also confident that improvement in economic activity would lead to traffic growth. But the management’s assurance has failed to assuage foreign investors. Over the past year, they have reduced their stake from 39.22% to 36.88%. That selling has been absorbed by sponsors and mutual funds. Their stake has increased from 15% to 16% and 9 % to 11.17% respectively.

Next in line 

While IRB InvIT is working to get back on track, IndiGrid has fared better. At first glance, IndiGrid, which is sponsored by Sterlite Power Grid Ventures, might not look appealing but it has been able to deliver steady, moderate yield. The Delhi-based company managed to raise Rs.22.50 billion, while IRB InvIT had raised Rs.50.40 billion. As compared to IRB InvIT, IndiGrid didn’t attract much attention when it was listed in June 2017. It was oversubscribed 1.35x with institutional investors oversubscribing 1.14x and non-institutional investors 1.57x. That moderate oversubscription couldn’t prevent IndiGrid closing 6.3% lower on the listing day itself. 

But as the dust settled, IndiGrid has emerged as an investor favourite as its underlying business model is annuity-based, which means more regular revenue. Analysts expect far less volatility in power-transmission assets, which promise a fixed tariff, as compared to other assets such as roads and ports. “IndiGrid’s power transmission assets, which have long-term fixed-tariff contracts, offer higher cash-flow visibility with lower risks,” says Jasani.

IndiGrid is also on a shopping spree. In February 2018, the trust acquired four assets — RAPP Transmission, Purulia and Kharagpur Transmission, Maheshwaram Transmission and 46% stake in Patran Transmission owned by Techno Electric for Rs.2.30 billion. The management says that after the new acquisition, the internal rate of return (IRR) has grown to 11% from under 9% (See: High predictability).

While the new acquisitions could give higher return, they will also not dent its credit profile. “The asset operates through a point of connection (PoC) mechanism (to minimise risk, payment is made to a central pool and then distributed proportionately among all transmission service providers).The assets also have been operational for over two years, and the terms of their transmission service agreement (TSA) are similar to that of other assets of IndiGrid,” says Jasani. 

Analysts also believe that the new assets will boost revenue and distribution per unit (DPU). The acquisition of four Right of First Offer (ROFO) assets and recently acquired Patran transmission project will ensure sustainable growth in net distributable cash flows (NDCF), according to Swarnim Maheshwari, analyst, Edelweiss Securities.“We expect the NDCF to double from Rs.3.2 billion in FY18 to Rs.7 billion in FY20,” he adds.

Last-mover advantage 

Looking at the lukewarm response to IndiGrid’s offering, L&T IDPL’s IndInfravit Trust sold units via a private placement. “Since InvIT is a complex product, institutional investors have better means to analyse it and have a long-term appetite required for the product. That is why L&T decided to sell InvIT units via a private placement,” says Shubham Jain, group head - corporate ratings, ICRA. 

IndInfravit raised over Rs.30 billion through a private placement with Canada Pension Plan Investment Board and Allianz Capital Partners acting as anchor investors. Global pension funds and large equity players have already shown interest in investing in operational road infra projects with a good record. 

Operational road infrastructure projects give moderate return and are low risk, compared to under construction road projects. Jain says that large equity players are interested in operational projects, and don’t want any exposure to greenfield projects with their inherent risks such as non-availability of land and trouble in acquiring clearances. 

IndInfravit has five special purpose vehicles (SPVs), which have 16 operational toll-road projects. “These road assets have an established traffic density and are relatively easier to maintain,” says Jain. With the InvIT using a large part of the money raised from unitholders to service external borrowing, analysts expect the debt of the five SPVs to reduce from Rs.34 billion in FY17 to Rs.13 billion in FY19. Therefore, analysts believe, the InvIT will have ample cushion to deal with fluctuations in toll collections.

However, some risks associated with road infra projects also hover over IndInfravit. The SPVs remain vulnerable to inherent risks such as political acceptability of rate hikes after the concession period, toll leakages, development or improvement of alternative routes or alternate modes of transportation. ICRA has given a ‘Stable’ rating to IndInfravit but “trends in traffic growth rates, movement in WPI-linked toll rates, and profile of any new asset acquisition by the InvIT can have a bearing on the rating and will remain key rating sensitivities,” says Jain. Any reduction in traffic growth or WPI will reduce toll collections, just as with IRB Infra. 

Queuing up  

After the launch of two InvITs last year, other major infra players like Reliance Infrastructure and MEP Infrastructure have been planning to hit the market. But the performance of the listed InvITs hasn’t inspired them. Jayant Mhaiskar, vice-chairman and managing director, MEP, said recently that investor response after the listing of the first two InvITs has not been encouraging. 

The post-listing performance of the two listed InvITs has revealed that investors expect companies to deliver the promised yield. “InvITs are actually closer to debt than to equity, and a mismatch occurs when a fund with a higher cost of capital invests into a debt-like instrument,” says Jasani. While the companies face the uphill task of delivering high return, analysts insist that investors will have to be patient to reap the benefits from InvITs. “This kind of investment makes sense only to long-term institutional investors who don’t mind the lower cash flow in the initial years, to enjoy overall return in the final years,” says Jasani.