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InvIT funds: Bond-like securities lure IDFC Infra to road builders

LiveMint logoLiveMint 18-05-2017 Santanu Chakraborty

Mumbai: As India’s first bond-like securities giving investors infrastructure exposure begin trading, the sector’s top equity fund manager said he sees benefits in picking up shares of the issuers rather than the new instruments.

The hybrid instruments, known as infrastructure investment trusts, are likely to help developers reduce debt and release funds for new projects.

The nascent stage of the InvIT market and the return horizon means it may not be attractive for investors with short time frames to invest in InvITs, said Rajendra Kumar Mishra, whose IDFC Infrastructure Fund returned 58% in the past year to become the country’s top-performing fund focused on construction, road builders, transportation and utilities.

“A growth investor with lower horizon might still want to choose between the parent vis-a-vis investment trust,” said Mishra.

Firms that raise funds via InvITs should generate higher returns, and hence valuations, as they can now monetize assets without letting go of management control, he said.

A core part of Mishra’s investment is in construction and engineering services companies expected to benefit from the rising capital spending on roads, railways, metros, power transmission and distribution, he said.

Much of this is being driven by the government, which in February pledged a record Rs3.96 trillion to build and modernize the nation’s strained infrastructure.

An index of five companies expected to list InvITs, including IRB Infrastructure Developers Ltd. and GMR Infrastructure Ltd., has gained 30% since early December, when the regulator eased rules for the instruments. InvIT yields will range from 9.5% to 11%, according to estimates by India Ratings & Research Pvt. in February.

InvITs are more suited for long-term investors seeking strong and consistent returns though the yields offered aren’t attractive enough for equity funds, said Dinesh Balachandran, a fund manager at SBI Funds Management Pvt.

The “illiquidity risk” of the instruments also needs to be monitored, Mishra said.

“A sharp economic upswing—say like 2004-2008—would dramatically improve cash flows and the distributable surplus in a short period. It could make a good investment then.”

Mumbai-based IRB Infrastructure’s initial public offering of the securities—the first of their kind—received bids for about 8.6 times the number of units offered and lists Thursday.

Sterlite Power Grid Ventures Ltd., Reliance Infrastructure Ltd. and IL&FS Transportation Networks Ltd.’s are expected to come to market this year and, along with IRB, may use the proceeds to reduce overall debt by about Rs13,000 crore, according to India Ratings & Research.

GMR Infrastructure and MEP Infrastructure Developers Ltd are also considering raising funds via the instruments.

“Infrastructure stocks have been laggards for long,” said Balachandran, who manages Rs5,600 crore rupees at SBI Magnum Tax Gain. “We are beginning to see value in some stocks with the turn of the investment cycle.” Bloomberg

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