IRB INVIT TRUST- new game in the town!

170

I don’t think they need to get the yields back to normal zone for buying assets. Their LTVs are sub-30% - so they can use 100% Debt funding to acquire assets, which would be DPU accretive and help in improving market price. Current Yields would have mattered if they had to use Equity raise to fund acquisition.

Further, I don’t think the regulations for buyback by REITs/Invits are still clear.
To give confidence they can probably utilize the 10% of NCDF which they can retain for buyback. Though the amount wont be much - at least 2-3% of shares can be bought back and extinguished. This itself over the next 3-4 years can be a 10% kicker in EPS.

Anyways I feel SEBI/ Government would clarify in a few years that buyback is part of 90% NCDF. That would allow them to buyback a substantial amount.

Currently with adjusted DPU of Rs.8 per share (considering two assets would go off next year) which is a yield of 14.5% the price I think would cap out around mid 60s. Road based Invits should ideally give 12+% yield for investment rationale.

171

While I understand by the leverage (borrowing at 8% and buying assets with 12% IRR) they can increase distribution, the question is how many unitholder would vote in favour of these assets acquisition when the units are trading at current yield of 15%? I would definitely oppose that resolution for sure, however larger community may agree. It does not make sense to me to deploy funds in assets yielding 12% when buyback can provide you return of 15%.

172

thing is buyback law is not very clear. This is the current lacuna in regulation as per me:

  1. can you raise Debt and utilize this money for buyback ?
  2. if you use the NDCF for buyback - is it included in 90% compulsory distribution or to meet the 90% rule this has to be only in form of Dividend or Capital Return?
173

This is quite on the block ! …and correct…
Just a highlight. IRR ( not yield ) is 14.8 %-15.1% on today’s price.

174

yes, IRR would be in the range you have indicated… but i like to keep it simple, so I just look at yield to make my investment decision… especially since i have invested in an Invit for regular income and not any growth… also since calculating IRR based on DPU growth has to many variables - traffic growth, expenses, extensions etc… things which i am not very good at estimating…

175

IRB INVIT - If economic activity normalises by June End, then IRB invit may give ₹12.5/unit payout in FY22 & a base case distribution of ₹7/unit in FY23

Summary of my analysis;
(I am assuming Pathankot Amritsar starting by July End)

  1. Highest Distribution in FY22:
    EBITDA ~₹1200cr+
    Cost below EBITDA - ₹410cr,
    NDCF ~₹800cr/₹14/u
    Distribution ₹12.5/unit (of this, ~₹5-6 could be tax free dividends this time, as two projects are coming to N end and there is only so much debt, so rest has to be paid as dividends)

  2. FY23 distribution ₹7-8/unit is visible:
    EBITDA ~₹825cr,
    Costs Below EBITDA ~415cr
    NDCF ₹7.1/u (+ cash of ₹2.5/unit at the end of FY22)

Details:-

a) Key Observation:
3Q21/4Q21 EBITDA was nearer to normalised for covid impact = ~₹300cr (adjusted for pathankot)

So, annualized FY21 normalised EBITDA ~₹1150cr (assuming some growth happened in 2nd half FY21)

b) For FY22 - IRB has got 4% weighted average tariff increase (FY21 was 2.6%). Looking at past 4-5 month growth, easily 5-8% tariffic growth is possible in FY22

c) Based on above - FY22 EBITDA ₹1200cr minimum (in this i am taking ₹50cr less for 1Q22 due to covid 2nd wave impact)

d) Of 1200cr FY22 EBITDA, ~₹575cr is from 2 Gujarat Projects. These projects will likely have to pay ₹400cr as dividend to trust in FY22, which in turn is likely to be paid out as tax free dividend to unitholders

e) Below EBITDA expenses are:

Invit management - 20cr
Interest - 120cr
Debt repayment - 55cr
NHAI premium - 215cr

f) In FY23, following is likely to happen:

Two Gujarat projects will remain for 2 months, so ₹110cr EBITDA (assuming marginal 15 days extension for 2nd wave)

Rest of project EBITDA = FY22 adjusted EBITDA of Rs650 × 10% growth = ₹715cr

Total EBITDA = 825cr

Below EBITDA expenses likely to be similar

g) Current cash in hand is ₹1/unit & in
FY22, it is likely to add ₹1.5/unit

So if they pay ₹7-7.5/unit in FY23, then for FY24/25, they can pay 1-1.5/unit per year out of cash

Thus, distribution may never go below ₹7/unit

Plus if acquisitions, then some upside but i dont assume that as of now

Conclusion:
Overall, there have been two big changes in past few months which are not reflecting in price

  1. Covid has led to bigtime PV traffic increase
  2. Fastag implementation has plugged leakages & led to better traffic numbers being reported

In next 3-6 months, IRB Invit is likely to outperform vs. expectations

Note:
This is not investment recommedation
I am not SEBI Registered
My view may be biased, as i am invested

4 Likes
176

Seems similar to my thoughts - they have few things going against them -

  1. governance deficit (irb as promoter) - if some other PEs / entities with better givernance stds take over trust like it happened with Indigrid
  2. They need to buy new assets - not sure what is holding them
  3. Private Invit with GIC - conflict of interest - who will have a better pick?

Disc: Invested

1 Like
177

Only point is that these are all known issues, factored in price already. If any of these issues improved upon, it will be a material positive event.

Plus, as i pointed out, if it beats expectations in toll growth & distribution (as i highlighted), it will be a positive event

178

Totally agree with your views.
Yesterdays, Arbitration award from NHAI increases the Concession period of Pathankot Toll by more 520 days. Worst case scenarios is dipping of DPU to 7/8 which is still the best yield in current scenario from a AAA rated instrument. Revenue lost in last year and current year due to Covid is only getting accrued in long term. I have a belief that management will come out with atleast one project intake in coming 6 months and that will push this Invit near to its NAV. Inflation numbers are now on higher side and the toll revisions will be accordingly getting revised. This invit has an inflation hedge as compared to other power Invits and current prices make it a value long term investment.

Management has sounded good last time on concluding new project with expected IRR of 13 to 14 percent witha debt below 7 per cent. Some action on their promises will give further confidence in above hypothesis.

Disclosure: Invested from lower levels and views can be biased.

179

Can watchers of this counter give their understanding of the monetary part of the arbitration award being given off to some “erstwhile EPC claim” of parent…which to the best of my knowledge has never been disclosed in any published annual report etc.

180

Results & Call update

  1. Management indicated a Payout of ₹10/unit in FY22 (after retaining ₹2/unit as cash reserves). This would mean ₹2.7-2.8/unit per quarter distribution for next 3 qtrs.

  2. Mgmt also guided for a minimum of 8.5-9/unit distribution from FY23 onwards, excluding impact of any acquisitions, which may add to this (So, ₹2.1-2.25/unit distribution per qtr). They indicated one HAM asset acquisition in FY22 (most likely could be a transfer from sponser as one asset is getting completed in 2Q22). Then thereafter they expect to acquire 1 asset every year.

  3. Pathankot Amritsar yet to start but as per mgmt they will get ₹6-7cr per month from NHAI (as compensation) as against collection forgone of ₹11-12cr/month. Plus they will get concession extension for similar period for which the toll collection is stopped. (In my view, there is no hit to NAV whatsoever due to toll collection stoppage, infact it may marginally increase NAV)

  4. Annual Report indicates ₹5-7/unit of cash reserves they have already built (although actual cash is ₹9/unit or so but part of this may not be free cash). Part of this cash might be utilised for asset acquisition as per mgmt in the call

  5. IRB invit is currently trading at IRRs of 15-18% based on 9-11% toll revenue growth assumptions (4-5% tariffs, 5-6% traffic). Other Invits are trading at 8-9% IRRs. There is a big gap. Once the Covid impact & Amritsar Pathankot numbers are back creating visbility of 8.5-9/unit distribution for FY23 & one value creative acquisition happens, there is large rerating potential here

Disclosure
I am an investor, so may be biased
Am not SEBI registered

1 Like
181

Thanks for your analysis.

I believe Management only indicated 8.5 or more DPU this year and a cash reserve of Rs 2 .

Management is conservative in their approach in any acquisition and that is prudent considering current pandemic scenario.
Their commitment to bring on board 1 project per year gives some confidence on their vision but it needs to be seen and proven in future.

I agree that all above projections are well priced in the current market price and current IRR of 14% + still makes it an investment case.

My views are also biased considering I am invested

182

In one place, mgmt said that in FY22, they will be able to better the payout of last year which was ₹8.5/unit. So its not 8.5 or more, but its more than 8.5

Secondly, to another query, while explaining something else, mgmt highlighted a payout number of ₹10/unit for FY22 (later on i will post the time stamp of this from concall)

Thirdly, to create a reserve of ₹2/unit, considering the Invit rules, they need to generate minimum of ₹11/unit NDCF & pay ~9/unit. Below this level, cash reserve creation will fall short of ₹2/unit

183

Let me congratulate you for a crystal clear analysis of a moving target. Just wondering if you have the con-call recording or access to it? IRB has started editing and posting transcripts rather than the actual recording as in the past…

184

You can get the conf call (audio) on Researchbytes.com
You might need to create a free login.

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185

Here

186

Time Stamp - 37.35 minute (for context, you shud listen to this whole 2-3 minute conversation around this time stamp)

The time stamp is as per above concall transcript i posted

187

Answer to this question is - No i havent seen this in Annual report or disclosed somewhere earlier (may be i missed it too)

I think this is probably not an A grade mgmt quality group & therefore these problems will always remain

This is one reason why it trades & may be should trade at higher IRRs (probably 2-3% higher than lets say an Indigrid). But the implied IRRs at current valuations r too high (7-10% gap) & therefore the investment case in this

188

I absolutely agree. We are invested into this and trying to protect value. May I also bring to your and the forum’s attention that they have already paid off 63.5 crores won in the second arbitration to the EPC contractor ( read parent IRB ) AND THAT does not reflect in the 2021 balance sheet or cash flow statement. We have taken it up with the company and urge fellow investors to look into this and take it up on their own level. Even an analyst towards the end of the con call tried to breach the subject.

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189

I remember similar instant( Maintenance expense) was asked to management in last year concall for a transaction between IRB and IRB Invit. Management at that time declared that these transaction keep happening and IRB Invit charges interest for the money till its actually due. Perhaps, their suggestion was that these payments are assured payments of IRN and Invit advances to IRB at interest serves some income generation and hence they seem to be indulging in these.

MAnagement declaration of additional HAM project this year and subsequent years is the best announcement in current concall and reason provided for going ahead with Private Invit also made some sense.

I am still nibbling some more additional money as we have assurance of Invit running for long term and decent IRR.

1 Like