IRB INVIT TRUST- new game in the town!

(fabregas) #26

No. The 7 toll road projects currently in the portfolio have an avg. residual life of about 23 years (Source: IRB InvIT Factsheet). However the trust can add more assets to its porfolio by taking on debt. The current debt to equity ratio (as per the factsheet) is 0.25. According to regulations (again, as mentioned in the factsheet) the maximum permitted debt to equity ratio is 1.

Can someone elaborate on what the sponsor, IRB Infra in this case, gains/loses by selling an asset to the trust. I understand that it receives upfront cash, which it can use to strengthen its balance sheet. However it also loses a cash flow generating asset. If one were in IRB’s position what trade-offs would one consider before selling an asset to the trust?

(KunalKothari) #27

One obvious reason for the sponsor to sell would be to substitute (say) a stable 12% cash flow generating asset, for a (probably riskier) project expected to generate a substantially higher IRR.

(Dhiraj Dave) #28


The yield is factor of market perception about underlying assets, sponsors and liquidity situation. Since this are hybrid instrument, we need to take into consideration likely cashflow from existing and expected future assets. We do not have any information about potential acquisition over life. However, we may assume that sponsor would have taken sufficient care while acquring assets for the InvIT. That is VERY BIG assumption in this investment and that is reason why despite lower distrbution of Rs 3 per quarter by IndiaGrid InvIT as compared Rs 3.05 per quarter by IRB InvIT, we find IndiaGrid InvIT Trading at price of around Rs 92/unit while IRB InvIT trading at Rs 76-77/ unit.

Further volatility in road sector is presmued to be higher than grid transformer assets where agreement with central utilities are giving more stable cashflow to IndiaGrid while inflow from IRB InvIT would be function of traffic, which is volatile and hence determine final distribution to IRB InvIT investor .

Third factor of difference is assets owned by IndiaGrid would be continue to owned by them even after completion of agreeement after 25-30 years (which provide whatver limited but terminal value to InvIT) while Road projects would be handed over by IRB InvIT to Government after compleition of concession agreeement.

I am just comparing two listed InvIT so that one get better perspecgive about opportunities in the hybrid investment space.

On your specific question about yield, the sponsor as well management have given indication of around 13-14% yield. Yield is also function of interest rate of loan taken by InvIT, expected traffic flow (yield may remain same but cashflow timing may differ. If traffic is lesser than projections, the concession agreement would provide increased tenure, which mean lesser cashflow in medium term but higher cashflow in end providing same yield). It would also vary based on new acquisition of assets where we have rely completely on managment which is the most critical factor in investment in my view.

Enclosing image of expected cashflow distribution for IRB InvIT which was provided in one of the presentation for your reference.

In third point, to address this concern, the sponsor is expected to hold minimum 15% stake during the life of InvIT. While it may align interest, still there is possiblity of transaction being not at arms length. The valuation of infrastructure assets over life is factor of cashflow and discount rate and there are no guarantee that assumption at time acquisition would be valid throughout the life of assets.

In the 21 message of thread you wanted to understand process about transfer from IRB to IRB InvIT. While there are indpendent valuer and board which would are also expected to protect interest of investor, I would suggest that investor himself/herself shall do working on structure and understand dynamics of underlying cashflow and yield to make decision of investment. For instance, IRB InvIT has assumed increased tenure of road assets (Surat Bharuch as well as Dahisar Surat) due to earlier lower traffic generation then projection. However, in process, the company need to approach NHAI for approval along with all supporting documents. Normally, NHAI does take decision in line with concession agreeement to provided to required yield on assets, still there is probability that NHAI may delay/deny extension of concession period or increased in toll charges (despite increase in inflation) which may have adverse impact on yield of IRB InvIT.

Last point is the major cashflow currently for IRB InvIT are coming from Dahisar Ahmedabad (two road project) which would be completing there tenure in next 2-3 years. In case there are not new addition to assets and other 5 assets are not able to show improvement in traffic, then there could be lower distribution to InvIT investor. While management did indicated around Rs 3 per unit distribution per quarer (annual around Rs 12 per unit) for FY19 and FY20, one has to account for this factor to take investment decision.

Discl: I am invested in IRB InvIT and IndiaGrid InvIT. The investor shall undertake own due diligence before investment, more because of structure and also minmium investment lot of Rs 4-5 Lakhs. My understanding of strucutre and cashflow may be completely wrong and investor shall not rely on same.

(fabregas) #29

Thank you @dd1474 for taking out time and putting efforts to post such a detailed reply! :+1: I really appreciate it.

Can you share the link to this presentation?

About the graph - I was not aware that at the end of the trust life, the balance capital would be returned to the unit holders (the red line shoots up to almost Rs 90 per unit). I was under the impression that the payouts would only be from operational cash flows. At the end of the tenure IRB InvIT would return the road assets to NHAI. So where would the capital, to return to the shareholders, come from? What am I missing?

(Dhiraj Dave) #30

It was from Annual report of Fy18. You can get same from website. Also, on factsheet section of IRB InvIT website also similar graph is available which provide total distribution estimate of around ₹ 438 per unit over life

Refer to section on yield calculation and how do I get my capital back on above link. Same also have another graph showing distribution over life.

(Gagan) #31

The promoter of IRB Infrastructure Developers has bought 75 lakh units (or 1.29 per cent) in IRB InvIT at ₹75.60 a unit for approximately ₹57 crore. Following the acquisition, the promoter’s stake in the InvIT increased to 1.31 per cent. IRB InvIT Fund, the Trust settled by its sponsor IRB Infrastructure Developers, has reported a net distributable cash flow of ₹177 crore in the first quarter of FY19, a total distribution of ₹3.05 per unit and an EBIDTA of ₹250 crore.

Promotors themselves buying from open market is a good sign.

Disc: Invested today.

(fabregas) #32

Although not directly linked to IRB, but this is relevant for this thread:

Apparently (I have yet to verify this), half of IL&FS’s debt is due to highway build-operate-transfer (BOT) projects. Il&FS is now trying to sell road assets, however it seems the deals have not been happening due to differences over valuation.

IL&FS, which is a long term project financier, failed due to some reasons and this should be a point of concern for anyone who invests in infrastructure investment trusts. I plan to do a case study on why IL&FS failed and I will post a separate thread for it.

(tkkabdulla) #33

Terminal value is zero and no return of capital at the end . Rs 90 is projected based on expected cashflow final year. The toll fee traffic increase anticipated to reach that value.

(fabregas) #34

There must be some basis for the Rs 90 cashflow in the final year, right? As far as I know, when the concession agreement with NHAI ends the assets are handed back to NHAI. So I don’t understand the projection of huge cashflow in the final year.

(AmitContrarian) #35

they are saving 10% every years from the net cash flow … that might add up.

(tkkabdulla) #36

Rs 90 is for final two years based on anticipated cash flow calculated under the assumption Traffic Growth of 5.5% p.a, WPI 4.5% . There was a valuation report uploaded in this post which project this. As per the company presentation a total return of Rs 438/unit over the life period. As per regulation they are disbursing 90% or above of the free cash flow and the balance they might use when some road assets expire in coming years. All calculation based on many assumption and end result may vary significantly…

(Saajidxb) #37

Hello all…

Saw the returns are in form of Dividend/ interest/ROC. for Invst trust funds…Can understand dividend and ROC…but why the returns comes as Interest…? Any idea?

(Dhiraj Dave) #38

The trust give loan to infrastrcuture SPV which it owns. The interest received from SPV on such loan is income for Investment Turst which is distributed back to the unit holder as interest. This is my understanding based on reading from FAQ on IRB InvIT website and may be wrong. I am enlcosing screenshot of same

(AmitContrarian) #39

If you put terminal value to be zero then how would u value them ?

(fabregas) #40

InvITs are one of those simple instruments which can be valued using discounted cashflows.

(PadivalsMarketMusings) #41

Thanks @dd1474 for your detailed note - This is very helpful!.. Just one observation on the Capital Reduction / Buyback at the end of the life of the asset. The Rs 90/- reduction in capital / return of capital to the unit holder might actually pan-out only in-case the management decides not to re-invest these proceeds into new projects. In a scenario, where the return of surplus capital is not accomplished but re-invested into other projects, then return of Rs 90 might be hypothetical - However the re-investment has the potential to maintain a stable DPU / improve ROCE.

Just one additional question that @fabregas had also quoted above on the potential to receive a “Return of Capital” - Given that these assets will be transferred back to NHAI, how would the trust realize Rs 90 at end of life?. Does the contract mandate NHAI to buy-back at a certain fair value or since the sPV/Trust distributes only 90% of NDCF every year, does the cumulative addition of this 10% account to Rs 90/- at end of Asset Life?.


I have been scratching my head over ever rising yield in IRB Invt trust. While rising interest rates are just one side of the explanation for its relentless slide. Here are few factors that I could gather

  • Rising yield : a good AA NCD is yielding 10.5%+ for 10 yrs offering great certainty so why one should bother about other risky instruments.

  • Slowdown: unlike Indi Grid trust, this vehicle suffers from economic growth slowdown resulting in traffic slowdown or less than expected growth in traffic over the longer term.

  • Lack of understanding - I have tried making people aware of these instruments but I felt it was really difficult to convince them to commit anything despite attractive yield.

  • Perceived corp governance issues - No doubt IRB suffers from this discount and lack of transparency. L&T’s IndInfravit fund is trading at premium for reasons not understood by me but there is a competition which is better valued. So we need to keep in the mind the image of the sponsor as well.

  • Huge supply pipeline - every Invt trust wants to expand its asset base and even the govt is expected to take this route at some point of time so institutional investors can wait and watch for the best assets.


Few more issues :-

  • A large portion of NAV comes from future revenue growth which will be volatile to say the least. This brings uncertainty element in present value of earnings in far off years.

  • Revenue growth assumption takes two factors - traffic growth of 5.5% and 4.5% of inflation in toll rates. No issues with traffic growth but inflation assumption is problematic. Typical formula for toll revision is 3%+ 40%* WPI so they have taken 4% inflation growth over the long term. However, toll rate hikes in 2018 has been ~2.8% yoy across different assets. Management claims it is due to deflationary trend in prior year. Also, given the backlash against high toll rates in some states, they might not be able to raise toll rate by say 7-8% when the inflation is actually high.

  • Capital reduction: I certainly don’t like the idea of capital reduction so early in the life cycle. Their asset growth strategy involves leverage but SEBI has capped it at 1:1 so is it not wise to preserve capital for future leverage and earnings? The spread is quite good at 3.5% since an Infra company could raise debt at 12%+ but the trust could raise it at 8-8.5% given its AAA rating.

I think all these have added to the uncertainties in the short to medium term and resulted in very very attractive yield but the risks are high too in comparison with Indi Grid.

Disc: Not invested yet

(AmitContrarian) #45

Also unlike bonds here there is no return of principal … that way if you value then its rightly trading @15% yield.
because a 10-11% yielding bond will return the principal.


That is not correct technically. These trusts aim to be perpetual assets or will liquidate at some point of time through buybacks or gradually as capital reduction. They can also do buybacks but rules are not clear currently. No doubt these assets are attractive and suited for HNIs or retail investors who could stomach some volatility. Edelweiss is known to offer these type of assets to its wealth clients who look for higher yields. This article indirectly endorses business models of both public trusts i.e. Indi Grid and IRB Invit