IRB INVIT TRUST- new game in the town!

Those interested in INVTs, please go through this consultation paper issued by SEBI.

https://www.sebi.gov.in/reports/reports/jan-2019/consultation-paper-for-amendment-of-sebi-infrastructure-investment-trusts-regulation-2014-and-sebi-real-estate-investment-trusts-regulation-2014_41840.html

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While I agree that current payouts look handsome (Rs 12 on unit at @Rs 70), I think one needs to thinks if IRB INVIT can continue giving current returns @ Rs 12 per year in the future.
Given that itā€™s revenues will shrink by 50% as two its most profitable project move out of its ambit after 3 years (end of 2021), it looks difficult.

Another worrisome point to note is that for one of the projects , INV IT has to provide fixed premium to NHAI @ Rs 150 cr per year.
Till now this payment is deferred by INV IT and is added to cash flows and distributed to unit holders, which looks to be inflating the payouts.
But this cannot be continued forever, the trust will have to pay this amount added cumulatively sometime sooner to NHAI.

Overall if you see, out of Rs 12 yearly payout ā€“ Around Rs 6 (comes from 2 projects going to move out of its fold after 3 years) and Rs 1.5 (comes from deferred payments to NHAI).
The remaining Rs 4.5 (12-6-1.5) will not be great returns as anticiaped in the future.

The trust hardly have anything in cash/ investments as 95% of cash flows are paid out to unit holders, so reserves cannot fulfill the slump to future income.

Having said that, if your perspective is that other projects will catch up and fill the shortfall of future income, you are good to goahead and acquire. If not, think more about it.

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@Amit2saxena

Appreciate your efforts to highlight a valid point of delay in payment to NHAI. While what you say is absultely correct, I have different view point on this issue.

The way I address this issue is to look at Total cashlfow accruing to InvIT from all projects. I am enclosing my working from the lastest calculation of Fair Value as on September 30 2018 as submitted by IRB InvIt to BSE. The valuation report does take into account free cashflow which would have been adjusted with delayed NHAI payment as well in my opinion. From the that cashflow, Present value of all assets is calculated in Cell P36 at around Rs 6130 Cr as against Market value of Rs 3947 Cr at current price of Rs 68 per unit. So IRB InvIt is trading at around 64% of the expected market value.

On second point, about 2 projects moving out, we also need to factor in increase in traffic growth (volume growth of around 4-5%) and revision in toll rate (against around 3-5%) of the continuing projects. Since the duration of the project is very long, with increasing economy activity, the traffic would continue to increase for 5-10 years per annum.

In enclosed file, I have compared expected casfhlow from road project as projected in March 2018 (Column I to Column N) with revised cashflow projection September 2018 (Column P to column V). September 2017 cashflow projection are also provided in Column B to column H. When we compare cashflows in 7 projects (from FY20), we find in 5 road projects ( Surat-Dahisar, Tumkar, IDAA, MVR, Talagaon) expected cashflow are higher then what was expected in March 2018. However, in two projects i.e. Jaipur and Pathankot, cashflow is lower then projected in March 2018. Further, even if their lower traffic growth, the concession agreement is likely to increase tenure to provide expected IRR to InvIT as per NHAI guideline.

Risks:
The big assmuption, when we rely that projected cashflows, is that would be materialise as expected in valuation model. However, as we know, life is full of uncertainity. For instance, the reason for lower toll revenue Jaipur highway in Q3FY19 was Mining ban which reduce truck traffic and it is expected to restart with High cout judgement. In case Dahisar Surat toll, Q3FY19 revenue and toll traffic was lower as there was maintenance activity on critical brdige which resulted in diversion of heavy load truck and other vehicles to differnt route for couple of weeks. Further, there are lot many moving parts, from ability to refinance long tenure debt, interest rate on loan, credit rating of InvIT, growth in traffic on various projects, growth in toll rate, NHAI approving concession agreement time enhancement due to lower traffic etc. which can material difference to actual realised yield for investor.

We also need to take note of Black swan event like cancellation of agreement as we have observed in Noida Toll Bridge. If such event happen, there might be materially adverse impact on cashflow of InvIT.

In nutshell, while there are risks for IRB InvIT, the yield is also attractive at current price. However, it is defintely not an assured high return fixed income products. Investor who are looking for certain cashflow shall take note of that cashflow from InvIT are not certain and there is business risk which may reduce the cashflow returned to investor.

Discl: I have investment IRB InvIt and IndiGrid InvIT. My view may be biased due to my investment. The investor shall consult his/her own investment advisor. I am not SEBI registered investment advisor. I also change my allocation without notice to this forum in case I find other attractive opportunities.
IRB InvIT Feb 2019 VP.xlsx (19.0 KB)

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I own IRB Invit since the last 1 year. I just sat down and calculated my returns from it in the last 1 year.

My purchase price for IRB was 74.
IRB gave 4 distributions in the last 1 year. Each distribution had 2 components - an interest component & a Return of Capital Component. The RoC is not taxable but the interest component is.

Over the year, distributed Rs. 8.60 as Interest for each unit of the InVIT. It also distributed Rs. 3.60 as RoC for each unit.

So at my buy price of 74 per unit, I got around 11.6% as interest (this is ignoring the RoC component of the distribution). However, the unit price is now 64, so if I were to sell, I would lose 10 Rs per unit, but since I got 3.60 as RoC, my actual loss would be Rs. 6.40 per unit.

For someone who buys it at a price of Rs. 64, assuming similar distribution in the coming year, he would get interest of 13.4% & also RoC. This is very good but overall whether itā€™s worth it or not, depends on how much the price goes down from here. If it goes down same as the RoC, then itā€™s great investment, but if it goes more, then itā€™s probably not.

So my main question is what is the prognosis on future trend of IRB InVIT?

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GIC, Singaporeā€™s sovereign wealth fund, invested Rs 4,400 crore in IRBā€™s 9 BOT projects. 3 of these projects have recently become operational and the remaining 6 are under construction. GIC & IRB together will form a private InvIT to manage these 9 assets. IRB will hold 51% and GIC 49%. At the completion of construction, the enterprise value of the assets would be ā‚¹22,500 crore.

GIC is an existing investor in IRB InvIT, where it holds about 8%. Since 3 of these assets are operational, it would have made sense for GIC to invest in IRB InvIT and then for IRB InvIT to acquire these 3 assets. Now these 3 operational assets, would be out of reach of IRB InvIT.

Also, if GIC has faith in IRB and IRB InvIT, they could have acquired units of IRB InvIT at a yield of almost 18%. I fail to understand why they had to create a new private InvIT.

My instinct says this is a negative for IRB InvIT.

Disclosure: Not invested. Evaluating.

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Not a perfect answer but probably they would need approval of existing unitholder while acquiring new units. When unit price was trading in range 70-77 per unit last year, it would be difficult to get approval from unit holders to dilute at Rs 70 per unit to GIC for acquisition of assets. Unitholder would have rejected that proposal. Hence, GIC may be decided to go on to private deal. Further, since no new dilution can happen, the new business would also be limited to IRB invIt. So kind of chicken and egg problem. (The existing investor having cost of Rs 102, received around 25 distrubution since issue, still would not be in favour of dilution at 65-67 per unit. New investor can not come at premium to trading price as same would result immediate mark to market loss on large investment value. As a result, no new fund and limitee ability to raise debt and hence limited growth prospect).

Discl: I hold my investment in IRB InvIT and my view may be biased. Investment shall consult SEBI registered investment advisor before making any decision.

They would not need unit holder approval to do a private placement. Indigrid raised capital from KKR & GIC recently and there they did not go for unit holder approval. There are SEBI regulations for private placements in InvITs and here is what they say:

An InvIT raising funds by way of a private placement in terms of the provisions of this Chapterā€“

  • (a) shall do it through a placement memorandum;
  • (b)shall raise funds only from institutional investors and body corporates, whether Indian or foreign:Provided that in case of foreign investors, such investment shall be subject to guidelines as may be specified by the Reserve Bank of India and the Government from time to time;
  • (c) shall not accept from an investor, an investment of value less than rupees one crore;
  • (d)shall not raise funds from more than twenty investors;
  • (e)shall file a placement memorandum with the Board alongwith the fee as specified in Schedule II, atleast 5 days prior to opening of the issue;
  • (f)shall file the final placement memorandum with the Board within a period of ten working days from the date of allotment of the units to the investors;
  • (g)invest not less than eighty per cent of the value of the InvIT assets in eligible infrastructure projects either directly or through holdcos or through SPVs:

Source: Securities and Exchange Board of India (Infrastructure Investment Trusts) (Amendment) Regulations, 2019

I think SEBI regulations have a base price for new capital infusion, if I remember correctly then it is something like avg. traded price for the last 14 days or 30 days.

Indigrid capital infusion happened at the rate of Rs 84 per unit, a huge discount to the NAV. That was because the average traded price was in the range of Rs 82 before the capital infusion.

What I am trying to say is - GIC could have done a private placement in IRB InvIT at a price like Rs 70 in July/August this year. IRB InvIT could have acquired new assets using these funds. Why did GIC and IRB InvIT form a separate private InvIT? Will they now treat IRB InvIT as a step child?

Disclosure: Not invested. Evaluating.

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Yes you are correct. But when funds are get inside the business, for new acqusition of assets, they would need approval of existing unitholders. This may create issue. Also, in the private InvIT they are better placed to manage affairs as compared with listed InvIT. Hence, while listing give liquidity, it take away flexbility. Hence, depending of priority of institutional investor, they would decide course of action.

Secondly, GIC can only affect InvIt by exiting from it at lower price IRB InvIt. I could not understand what you mean by ā€œstep childā€.

Thirdly, the premium discount to Indi Grid Invite was around 1-2 per unit on price of around 82. Even same on price of 65 is material. In fact in AGM there was discussion on the point. At price of 70 per unit, with assumed cashflow, yield were around 15-16%. So in order to make new investment attractive, the InvIT need to have bidding of assets at more than 16% over 20 years cashflow which is very difficult. At lower price of Rs 65, the indicative yield would be around 18% and hence it may buyback of existing units more yield acrretive for InvIT then to invest in new assets, which are generally traded at yield of around 10-12% in my opinion.

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I agree with you. A private InvIT would give more flexibility to the sponsor as well as the institutional investor.

And that is why I said if they (GIC & IRB) will treat IRB InvIT as a step child i.e. they wonā€™t acquire assets or raise capital for acquisitions in IRB InvIT. Why take the pain to manage a smaller public InvIT when you already have a larger private InvIT? If this happens i.e. no new assets are acquired, then the DPU would fall to Rs 6 to Rs 7 by FY22, when the concession period ends on the 2 biggest sources of toll revenue.

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it also depends on the cash flows of the projects theyā€™ve put in GIC JV.
New concessions take some time to get cash positive.
IRB Invit as one would understand would like to acquire only cash flow positive projects.

the traffic and other assumptions in this valuation report look very aggressive. that kind of explains the fall.
The IPO was based on this kind of aggressive assumptions and now the reality is something more sober

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Hi @sumi00. I noticed your comment on L&T IndInfravit. Why does its script not have any traded volumes even though it is listed on NSE?

I have a noob question - Why is the tax rate of IRB InvIT 0%? In the valuation reports they have taken it as 21.5% for the SPVs. I am assuming that the InvIT lends to SPVs in such a way that the SPVs are not left with any taxable profit. So all the tax obligations would only be at the trust level. What am I missing here?

L&Tā€™s Invit is a private trust and so the participants chose to make private deals on BSE. This may be due to better cost structure at BSE but I am not very sure.

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Conference Call Updates

Distribution

  • Payout of Rs 2.5 per unit, split as Rs 2 interest and Rs 0.5 capital reduction
  • FY20 projected payout maintained at Rs 12/unit.
  • Payout is lower due to:
  1. Softer volumes, as a result of unprecedented heavy rainfall during the quarter
  2. Major maintenance works on some of the projects (did not quantify the expense or specify the projects)
  • After a couple of years, the payout will have some component of dividend.

Volumes

  • As the monsoon recedes, volumes are improving and October numbers are encouraging (management did not quantify the improvement)
  • Q1 and Q2 are always slower in the toll road industry
  • Toll collections were Rs 4.13 crore per day in Q2 FY20. In October the number is Rs 4.7 crores per day.
  • If this improvement in volumes holds up then the InvIT will be able to payout Rs 12/unit in FY20.

Acquisition

  • Looking to acquire a couple of projects from banks, before the end of FY20
  • These are operational BOT projects, will improve geographical diversification
  • IRR improvement expected to be 1% to 1.5% post acquisition of these projects (remember the trust can still borrow additional Rs 4,500 crores)
  • No other details shared about the banks and projects in question
  • IRB HAM projects: None of the projects would qualify for acquisition for the next 1 to 1.5 years

Units Buyback

  • IRB InvIT has given representation to SEBI for buyback of units
  • No update from SEBI yet

Pathankot Amristar Toll Road

  • Acquired in September 2017 for Rs 1570 crores, funded entirely by a loan taken from SBI
  • Was expected to be cash neutral for 2 years, expected to contribute to NDCF from FY20
  • Has an interest outgo of about Rs 150 crores on an annual basis
  • Right now it is almost at a break even level (so still not profitable)

Other Updates

  • Tarrif revision between 3.1% to 4.38% across all projects
  • NHAI granted 438-day extension for Surat-Dahisar project. In the Q2FY20 presentation the end of concession period is mentioned as May 22 v/s Jan 22 mentioned in Q1FY20 presentation
  • FASTag implementation from December onwards, company is well prepared for it
  • Borrowing cost down to 8.35% from 8.55% from 1st October 2019
  • Changes in tax structure led to Rs 300-400 crore saving over the life of the projects
  • Cash at the trust level is at Rs 60 crore, unchanged as compared to last quarter. They would like to maintain Rs 50-55 crore cash balance

Disclosure: Entered a couple of weeks back. Forms small (< 5%) part of my portfolio

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Promoter Holding Pattern:

|Period  | Promoter Holding  (Sponsors + related parties)                  
|--------|-----------------------------------------------
| Jun'18 | 16.04%                                         
| Sep'18 | 17.53%                                         
| Dec'18 | 18.37%                                         
| Mar'19 | 18.39%                                         
| Jun'19 | 18.40%                                         
| Sep'19 | 18.40%                     

While the management appears quite incompetent on the conference calls, the trend in sponsor shareholding has been encouraging. They mentioned about unit buyback in the latest conference call.

GIC (Govt. of Singapore Investment Corporation) holds about 8.3% in the InvIT and they have recently partnered with IRB to form a separate private InvIT, where GIC will hold 49% and IRB 51%. Initially, I thought this development was negative for IRB InvIT, but now I have changed my mind.

I have a strong suspicion, that the new private InvIT will acquire units of IRB InvIT, as the yield/IRR is too attractive. They are acquiring new projects at 14%-15% IRR, whereas the IRB InvIT IRR is around 20%. This is pure speculation, so please do your own due diligence.

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I own IRB Invit at 74 for the last 1 year or so - IRB INVIT TRUST- new game in the town! - #52 by VijayShetty

How exactly does capital reduction work? I have been getting payouts which include capital payback. Does this men that once capital payout cumulates to the face value of the Invit, we will cease to be owners of this Invit? If so, what is the net capital payback which has happened till now & what is the net capital remaining per unit now?

If one plans to hold this for the long time, should one worry about the daily price of this? I mean, in the end, after all capital is paid back, this will go to 0, right?

Distribution can be in 3 ways:

  1. Interest
  2. Dividend
  3. Capital Reduction

I am not really sure about the difference between dividend and capital reduction.

If the InvIT decides NOT to grow its asset portfolio, then eventually it will return all the capital (when the concession period on the last asset ends). If there are no assets, the unit price will go to zero as well.

I have not calculated this. This information is available on the InvITā€™s website.

If the InvIT decides to grow its assets, and if you get your desired yield then the daily price fluctuations should not matter. In this conference call the management has expressed its intention to acquire new assets and also go for buyback.

Privately listed toll road InvITs like L&Tā€™s IndInfravit Trust have not seen any drop in its unit price. There are no private trades happening, which means the institutional investors who own the units are content with the yield. Operationally, there is no reason to believe that IRBā€™s InvIT is managed any differently. IRB group is known to have political connections, allegations of land grab, alleged murder of RTI activist etc. So there will always be management related risks.

Hi Dhiraj,

Are you still holding the IRB InVit Units. Also any view now that the price dropped to 50 levels?
Not sure why unit price dropping so low?