InvITs – A high yielding Asset Class for long-term investors

Infrastructure Investment Trust (InvIT) is a collective investment vehicle that pools together funds from long-term investors to acquire income generating infrastructure assets from developers. It can be looked at as a portfolio of underlying operating Infrastructure Assets with a regular and stable stream of income and cash flows. These cash flows are passed on to the holding trust (InvIT) to be paid out to unit holders in the same manner as it accrued to the Trust.

IRB InvIT is one such Infrastructure Investment Trust set up by IRB Infrastructure Developers Limited. IRB InvIT owns a portfolio of 7 income generating Toll Road Assets in the states of Maharashtra, Gujarat, Tamil Nadu, Karnataka, Punjab and Rajasthan.

Being at a 28% discount to its reduced issue price of Rs. 97.50, IRB InvIT is an attractive proposition for long-term investors who look for periodical returns by way of interest/dividend.  

Basic Features:

1. Listed on BSE and NSE with a Face Value of Rs.102 in May 2017, yielding 10.5% IRR.
2. Initially acquired 6 projects with concession period extending up to Sept 2037.
3. Expectation of 9.5-10% growth (5.5% traffic growth and 4-4.5% price growth).
4. Each Project SPV distributes at least 90% of its net cash flows to the InvIT.
5. Within the regulatory framework, InvITs are classified as equity. They are traded in the equity cash segment on the stock exchanges.
6. Though classified as an equity, InvITs are more of a yield product and should be compared with debt or fixed income products.

Events after Listing:

1. Currently the investment trust holds 7 toll road concessions costing around Rs.7500 Cr, with another addition proposed in FY 20 costing Rs.1500 Cr. with concession period extending up till 2041
2. The first six highway projects were funded by equity while the seventh was funded entirely with debt sourced at 8.15%.
3. Presently the InvIT is priced around Rs.70 declining over 28% since listing. (Reduced Issue Price 97.50)
4. Liquidity constraint is one of the major contributors for decline in price.
5. Top 2 projects contributing around 60% of total revenue have concession periods until Jan 2022, cash flow projections beyond that is uncertain.
6. The toll revenue for Q1 FY19 of Jaipur Deoli and Pathankot Amritsar Project is affected due to lower mining traffic which may continue for Q2 as well.
7. Conservative estimate for growth poised around 8-8.5%.
8. New issuance of InvIT by L&T at a higher yield (priced @12% IRR. Canada Pension Plan Investment Board (CPPIB) has subscribed to 30% of the units).
9. Distribution guidance for FY19 is 12.3%.

Outlook:

1. The product is virtually perpetual in nature, with concession period extending up till 2041 (considering new addition in FY 20).
2. Highly suitable for “Patient Capital”. Overseas investors still in the game, whereas short term investors have already stepped out, or are assumed to exit soon.
3. Considering current price, the product appears suitable for very long-term investors.
4. Current yield expectation of 13-15%, subject to traffic growth expectation over time appears to be rewarding.

What is in it for long-term Investors: 

For the last six quarters, InvIT has distributed income by way of interest. Going forward if growth assumptions are met, investors can expect dividend payment along with interest income. There is a possibility of capital appreciation if interest rates decline. Presently InvITs are available at a discount of 28% (Minimum lot in secondary market is 5000 units).

Distribution until now: (per Unit)

For FY 2018:

1^st Distribution:             Rs. 1.55   (Rs. 1.05 as interest and Rs. 0.50 as Capital Reduction)

2^nd Distribution:            Rs. 3.00   (Rs. 2.20 as interest and Rs. 0.80 as Capital Reduction)

3^rd Distribution:            Rs. 3.00   (Rs. 2.20 as interest and Rs. 0.80 as Capital Reduction)

4^th Distribution:            Rs. 3.00   (Rs. 2.20 as interest and Rs. 0.80 as Capital Reduction)

For FY 2019:

1^st Distribution:             Rs. 3.05  (Rs. 2.25 as interest and Rs. 0.80 as Capital Reduction)

2^nd Distribution:            Rs. 3.00 (Rs. 2.20 as interest and Rs. 0.80 as Capital Reduction)

Taxation

Interest Income:

Residents –  As per tax slab (withholding tax of 10%)

NRIs – As per tax slab (withholding Tax at 5% for NRIs – benefits under DTAA, shall be available)

Dividend:  

Tax Free in the hands of investor.

Capital Gains on sale of units:

Short Term Capital Gains: 15%

Long Term Capital Gains: Nil (If held for more than 3 years)

Capital Reduction:

To be shown as the adjustment to the investments value