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IRB InvIT Fund: success of the issue will pave way for other infra firms

LiveMint logoLiveMint 02-05-2017 Harsha Jethmalani

There’s a new kid on the block: road developer IRB Infrastructure Developers Ltd’s infrastructure investment trust (InvIT).

For the uninitiated, an InvIT allows one to invest in infrastructure projects and is registered with the Securities and Exchange Board of India (Sebi) as a trust.

IRB InvIT Fund has six special purpose vehicles (SPVs) comprising operational toll-road assets located across Maharashtra, Gujarat, Rajasthan, Karnataka and Tamil Nadu. IRB Infrastructure will be the sponsor of the fund and a project manager will manage the operations of the InvIT.

The InvIT aims to raise Rs5,035 crore. At the Rs100-102 price band, the enterprise value (EV) of the assets works out to Rs5,805-5,921 crore.

Naveen Kumar Saini/Mint

PhillipCapital (India) Pvt. Ltd says that in the draft red herring prospectus, IRB Infrastructure had sought an EV of Rs7,900 crore for the InvIT, which it is now listing at Rs5,900 crore. At current valuations, it is “selling” its projects at a virtual cost of 12.4% (implied internal rate of return) and one time book value—which might not appear to be an attractive bargain for IRB Infrastructure investors, according to PhillipCapital.

For IRB InvIT investors, the returns would be in the form of dividends, interest and buybacks. As per Sebi rules, at least 90% of funds collected, after paying for expenses, taxes and repayment of external debt, should be passed on to investors every six months.

But there are risks to these returns. For one, a decline in traffic volumes and drop in frequency of travellers may have a bearing on the financial condition and operations of these SPVs. Also, toll pricing is partially linked to inflation measured by the Wholesale Price Index (WPI) movement; it can get affected in periods of negative WPI changes and a rise in inflation would increase maintenance cost.

For the nine months ended December, the six assets under InvIT have reported a net loss of Rs13 crore. Profitability is likely to improve as interest costs decline after debt repayment.

Investors are eligible to take exposure to InvITs with a minimum investment of Rs10 lakh. Clearly, with this kind of cap, Sebi seems to be discouraging retail participation possibly because it is a new product and the understanding to evaluate performance is limited as of now.

However, if this issue finds enough takers, then more infrastructure developers would opt for this route to raise money. Analysts reckon that IRB InvIT’s valuation shouldn’t be taken as a benchmark for other road assets, as it was determined by the projects’ profile and bargaining power of investors. PhillipCapital notes that a delay might have fetched the IRB InvIT slightly better valuations, but it is a price the company has to pay for the being the first one to launch a new instrument.

What’s the impact on IRB Infrastructure?

The company gets to unlock the value of these six projects and churn capital in its portfolio. It will deleverage its balance sheet. IRB Infrastructure receives about Rs1,700 crore of the net proceeds of the issue and about Rs900 crore worth units for the 15% stake it will hold in the InvIT. Further, debt worth Rs3,350 crore related to the SPVs will cease to reflect in the consolidated numbers as it will be repaid. Accordingly, the consolidated debt-to-equity ratio is expected to reduce to 1.8 times from three times.

Macquarie says IRB Infrastructure’s Ebitda (earnings before interest, tax, depreciation and amortization) to interest ratio for FY18 would improve to 2.2 times from 2.1 times.

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