IRB INVIT TRUST- new game in the town!

110

Sorry about the delayed response. I was caught up in my day job for the past 2 weeks.

You are absolutely right. I was wrong, the valuers have indeed removed NHAI’s share from the cash flows while arriving at the valuation.

I confirmed this by referring to the March 2018 valuation report, which is available on the company’s website. The report contains DCF valuation for the Surat-Dahisar project, which means they will have projected cashflow from the Surat Dahisar Project for FY19.

Valuation Mar 2018
Valuation Mar 2018977×504 104 KB

In the valuation report, FY19 net sales are assumed to be around Rs 370 Cr, which is very close to the actual number of Rs 361.5 crores. So no concerns here.

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111

Hi - that’s a very simplistic way of looking at things. Two of there main assets are heading towards end of life by 2022 and income should fall to Rs.7 per unit (without considering any revenue increase in the existing assets).

At best, from 2022 onwards you can assume they would be earning Rs.8 per unit (7-8% increase in revenue per year due to escalation and traffic) and even in your calculations market is valuing it at distribution of Rs.7.2 per unit which doesn’t have too much disconnect.

Only way this company would be able to give good returns is on what valuation it adds new assets on which there is no clarity currently.

112

For the 7.2 distribution, my calculations assume no residual/terminal value after 10 years. Is that true for IRB InVit - I mean are they losing all their assets in 10 years & reduced to zero cash, zero assets?

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113

Road Invits have a definite lifetime… eventually it does go to zero…different assets have a different termination date (we can plot that and create a valuation for IRB)… but the key with investing in IRBI Invit is that they need to add assets… or even go for a buyback…

114

Yes, I know. That’s why I am asking - do all assets & cash with IRB go to zero in 10 years. If not, then the current market price doesn’t even expect them to pay 7.20 per year for 10 years. It’s currently valued at even lower than that.

115

Well i felt the same at 70s and 60s when i bought the units and now stuck with it (the Invit has distributed Rs.12 unit to me during this period). So my loss would be recouped in maximum another 2 years.
Problem is not the return per unit we are getting. Issue is with the management quality and market perception of the management. If it continues like this - even the management may loose interest in running the Invit and do some gol maal in payment of distribution. My advice would be to take a decision remembering that.

116

Assume your average price of the Invit was Rs 65 & you get Rs. 12 for 3 years, then you will have to be able to sell your unit at around 45 after 2 years to be able to recover your losses (PV discounting at 8%). I really doubt if one will be able to sell it at 45 after 2 more years. Price will more likely be around 35 by that time (or even lesser).

117

Good efforts but oversimplification in my understading. I would appreciate on what basis you get Rs 10 for 10 years? One has to look at cashflow from underlying assets and growth pattern in same. In couple of project, the concession agreement is over 20 years, so one may assume cashflow over longer period.

While it is correct, that there no terminal value at the end of concession agreement for assets, but still one has to put efforts to project growth in traffic, expected increase in toll charge per vehicle and debt repayment for various SPV to get some idea about IRB InvIT cashflow.

As per the latest valuation report, (September 2019), the NAV of unit (again based on assumed free cashflow, which has not materialised in past and one shall take of note of same) is around 100 per unit.

In my limited understanding, the major issue faced by IRB InvIT is management concern. Transferring assets from IRB to another InvIT promoted by GIC (Singapore government investment company) not gone well with existing investors. In addition to under-performance from new asseets (Deoli Jaipur and Pathankot toll assets) have also created concern among investors mind.

While one can become extra conservative and simplistic, we would get solution which would be far off from reality.

InvIT is structure in a way from cashflow that dividend would come only after repayment of loan which is very large. So, while your approach to simplify working is appreciated, the outcome may materially vary (on either side) if the concern for managment are not addressed.

In last 3 years (12 quarters) toll collection from various assets owned by IRB InvIt has shown very good performance (I have complied this information from various presention by InvIt over the period of last 2.5 years of listing).

Tollection collection details Q3FY20 Q2FY20 Q1FY20 Q4FY19 Q3FY19 Q2FY19 Q1FY19 Q4FY18 Q3FY18 Q2FY18 Q1FY18 Q4FY17 Q3FY17 CAGR Q3FY20/17
Gross Toll Rs mn. 4,199 3,805 4,070 3,950 3,928 3,669 3,822 3,774 3,828 3,206 1,922 3,441 2,599 17%
Surat Dahisar Project Rs mn. 1,897 1,704 1,799 1,787 1,724 1,605 1,655 1,687 1,687 1,468 893 1,475 1,114 19%
Bharuch Surat Rs mn. 654 577 603 604 578 538 562 580 569 510 293 500 372 21%
Tumkur Chitradurga Rs mn. 609 588 629 601 635 613 628 598 591 556 323 543 401 15%
Pathankot Amritsar Rs mn. 329 286 335 293 319 294 313 282 313 11 0 271 238 11%
Omalur Salem Namakkal Rs mn. 264 250 253 248 249 227 236 219 222 206 117 193 149 21%
Jaipur Deoli Rs mn. 262 231 265 238 247 231 260 249 285 316 207 311 223 6%
Talegaon Amravati BOT Rs mn. 184 169 186 179 176 161 168 159 161 139 89 148 102 22%

While the growth in Traffic has slowed down in last 12 months (and mainly came from Mumbai Ahmedabad assets which would soon given back to NHAI on completion of concession agreement), There is possibllity of growth in underlying assets in my opinion. The managment really need to improve perception (by way of purchase of more units etc) and improve execution which could change perception of market.

Discl: My view may be biased due to my investment. Not Sebi registered advisor, Not a recommendation, Investor shall conduct their own analysis before taking any decision.

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118

lets see. I am just hoping some sanity prevails and management does some acquisitions which are DPU acreative.

119

So I emailed the investor relations team (swapna.vengurlekar@irbfl.co.in,
info@irbinvit.co.in) about the ambiguity about the end of the concession period for the Surat Dahisar project. For those who are not aware, you can refer to my above post. In their corporate presentation (which BTW is not sent to the exchanges. It is only uploaded on the company website), they have mentioned the end date as May 2022. Whereas in the valuation report, the valuer has considered cashflows till January 2023.

I received a reply from “info@irbfl.co.in” saying that the actual date is May 2022.

Now, this makes one question - why have the independent valuers considered the date as Jan 2023? This assumption leads to the overestimation of the enterprise value of the Surat Dahisar Project by 20-25%. I have asked about this in my followup email. I will post here when I get a reply.

You are absolutely right. I am wondering if anyone from the management is even reading the valuation report.

From the very beginning, the management has promised things and then under-delivered. They have time and again said that they are confident of growth rates in toll collections and maintain a DPU of Rs 10-12. That looks highly unlikely for the next year. In the Q2FY20 con call, the management had said that they would be adding a couple of operational toll assets before March 2020. Nothing was mentioned about this in the Q3 concall.

The management has a long way to go to improve investor perceptions.

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120

@fabregas First of excellent work and efforts to understand IRB InvIT. Your efforts have assisted me do more work and improve my understanding. My personal appreciation and thanks for same.

On the point about, increase in contract period, I went through concession agreement of Surat Dahisar as appearing on the following link:
https://www.irbinvit.co.in/1%20CA_Six%20lane%20Surat%20Dahisar%20Section%20of%20NH8.pdf

Refer to clause 29 in this agreement. I am enlcosing screenshot for everyone reference.
image

In my reading, there are definite time interval when traffic is evaluated on the Tollway. In case of variation in traffic (on lower side), the agreement provide for increase in concession period. I am not legal expert and my understanding may be completely WRONG. However, prima facie, I did not find valuer realing on the increase period as provided in concession agreement, (after critically evaluting traffic on milestone dates and variation) as being aggressive and would consider it be realistic.

Please let me know in case you or other reader find any loop hole in my understanding. I would appreciate and personally be thankful for impoving my understanding.

Discl: Invested, Biased, Not SEBI REgistered advisor, Not Recommending. May exit from investment in case find other attractive oppotunity without informing forum

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121

You are absolutely right. There is a provision for the increase in the concession period if the traffic is lower than expected. In fact the valuer has mentioned that an inspection was carried out on 1st Jan 2017 and the actual traffic was found to be lower than the target traffic by about 9%. The valuer has mentioned this in the valuation report. See this screenshot:

Surat Dahisar Concession Period
Surat Dahisar Concession Period810×286 66.1 KB

Just don’t understand why the management is putting the date as May 2022 in their presentations.

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There is announcement on BSE by IRB INvIT about closure of toll collection. Since same is considered as force majure, it would result in increased concession period for almost all assets.
http://www.bseindia.com/xml-data/corpfiling/AttachLive/2ef13257-87a7-4f9e-9097-72708084ef23.pdf

In my view, while the cashflow would increase due to enhancement and also higher cashflow resulting from higher traffic and inflations, same would not make for around 35-40% yield at which instrument is trading. So, in my reading, this is marginally negative for IRB InvIT. However, current price is already discounting significant deterioration to make any impact of such marginal adverse movement. In fact, in all practical perspective, in absence of the closure of tolls, InvIT would have incurred loss also for these 21 days given very thin traffic due to lock down.

I am enclosing my working for everyone reference. In case, I assume discount rate of 15% (cell I3), I get around -0.14% in XNPV, after adjusting for 21 days getting postponed and increase in end of termination date. In case I increase discount rate to 40%, still XNPV is lower by -1.31% in my working. Please let me know in case any error in my working.

Discl: My view may be biased due to my holding, not a recommedation, not SEBI registered advisor, My understanding may be wrong and I am not an expert.
IRB InvIT March 2020 VP.xlsx (17.2 KB)

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124

Something a bit odd that I noticed from the half-yearly valuation report of IRB InvIT. See below the communication from IRB InvIT. It says that they have appointed Santosh Nagalingaswamy as the valuer and then appointed Duff & Phelps to provide an independent review of the report prepared by the valuer.

image
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Now, on searching online, I came across this on the Duff & Phelps website under ‘Our Team’ section. Apparently the registered valuer is an external team member of Duff & Phelps. Seems pretty unethical if not illegal to employ the same firm to do the initial work and then also do the review. Seems like the practices followed by many small time CA firms who draw up the accounts and also perform the audit for the SME clients. @dd1474 @fabregas Your views would be welcome

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Ok, this gets even murkier now. Apparently the valuer is a director of Duff & Phelps India. See this Santosh Nagalingaswamy - Director information and companies associated with | Zauba Corp. Probably I am reading the letter from IRB InvIT incorrectly and cooking up conspiracy theories. Clarification from senior members would be much appreciated.

Disc: Not invested, but curious given the massive recent price decline

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125

I believe there is no issue to worry on this point. Find enclosed IBBI (entity which regulate valuation) guideline for valuer. No corporate entity, in my limited understanding, can become valuer. Being a professional, final responsiblity need to identity with individual human. Hence, valuation would always by individual. Enclosing guideline of IBBI related to independent valuer. https://www.ibbi.gov.in/uploads/register/Regulations-RV_1.pdf

There is scope for LLP of corporate also to do valuation work. But even then, the partner or director who is signatory owns responsiblity in case of future issue something similar to Satutory auditor.

Please refer to chapter II dealing with qualification and other issued about Registered valuer. So, nothing unusal or worrisome, at least on this point, in my opinion

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126

Positive news for INVITS and REITS

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127

I just looked at the concession agreement for the Jaipur (please see the link below). This is to understand if the NHAI is going to pay for any O&M expenses in case of force majeure. Since it is a non-political event, NHAI is not going to pay. It needs to extend only the concession period.

34.7.2 "upon occurrence of a Non-Political Event, the Parties shall bear their
respective Force Majeure Costs and neither Party shall be required to
pay to the other Party any costs thereof;"

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128

i think it is a political event - BOT projects were mandated by government to not charge during the lockdown period.

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129

Good point @saurabh. As per the agreement (given below), an epidemic is a non-political event. But, as per the ICRA note, this seems to be a political event (since the ministry of transport gave the order for complete closure). So, NHAI has to compensate for 100% of O&M and interest losses ( hope NHAI also treats this as political and no litigation)…

34.2 Non-Political Event
A Non-Political Event shal1 mean one or more of the fol1owing acts or
events:
(a) act of God, epidemic, extremely adverse weather conditions,
lightning, earthquake, landslide, cyclone, flood, volcanic eruption,
chemical or radioactive contamination or ionising radiation, fire or
explosion (to the extent of contamination or radiation or fire or
explosion-originating from a source external to the Site);