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IRB Invit Fund
First off the block
IRB Invit fund (Infrastructure investment fund) is the first of its kind of infrastructure fund, which is an irrevocable trust in accordance with the trust Act and is registered under Invit regulations. IRBInvit is sponsored by IRB infrastructure (Sponsor), which is one of the leading road development and construction companies in India. The sponsor had 22 BOT road projects on hand as on 31st December 2016, out of which 14 are operational, five are under construction and three are under development.

IRBInvit Trust primarily intends to own, operate and maintain a portfolio of six toll-road assets comprising 3,645 lane km of highway spread across the Indian states of Maharashtra, Gujarat, Rajasthan, Karnataka and Tamil Nadu. The road projects are geographically diversified, reducing reliance on any specific region or State.

These toll roads are operated and maintained pursuant to concessions granted by the National Highway Authority of India (NHAI). The sponsor and other entities in the sponsor group will transfer their ownership interests in the project Special Purpose Vehicle (SPVs) to trust pursuant to the formation transactions. These projects are:

- Bharuch-Surat National Highway (NH) 8 toll road, a 65.00 km section of NH 8 between Bharuch and Surat in Gujarat. Concession period is from 2nd January 2007 to 1st January 2022.

- Jaipur-Deoli NH 12 toll road, a 148.77 km section of NH 12 between Jaipur and Deoli in Rajasthan, Concession period starts from 14th June 2010 and ends on 13th June 2035.

- Surat-Dahisar NH 8 toll road, a 239 km section of NH 8 between Surat in Gujarat and Dahisar in Maharashtra. Concession period starts from 20th February 2009 and ends on 19th February 2021.

-Tumkur-Chitradurga NH 4 toll road, a 114.00 km section of NH 4 between Tumkur and Chitradurga in Karnataka. Concession period starts from 4th June 2011 and ends on 3rd June 1937.

-Omalur-Salem-Namakkal NH 7 toll road, a 68.625 km section of NH 7 between Omalur and Salem and Namakkal in Tamil Nadu. Concession period starts from 15th August 2006 and ends on 14th August 2026.

-Talegaon-Amravati NH 6 toll road, a 66.73 km section of NH 6 between Talegaon and Amravati in Maharashtra. Concession period starts from 3rd September 2010 and ends on 2nd September 2032.

All the above projects are fully operational.

Regulations regarding the fund

Under the regulatory guidance, the trust will have the right of first refusal to acquire sponsor's existing operational and future assets and can purchase non-sponsor assets as well, as per its investment strategy.

Further, a prior approval of the unit holders will be required at the time of any purchase / divestment of assets.

The trust has certain other regulatory conditions before deciding on the investments which include investing at least 80% of the value of the assets in completed and revenue generating infrastructure assets and balance 20% in under-construction infrastructure projects and securities of infrastructure companies in India (cannot invest in units of other InvITs),

Further, Invit should hold (directly or through SPVs) the infrastructure assets for at least three years from the date of purchase of the asset by the Invit (except investment in securities of infrastructure companies). Investment in SPVs is subject to the Invit holding a controlling interest (at least 51% of equity share capital) in the SPVs

The investment in Invit will be offering returns to unit holders in form of dividend and interest.

Dividend distribution tax is required to be paid by Invit while distributing dividend to non-institutional unit holders from the income generated from its core business.

If the units are sold within less than three years, then there will be short-term capital gain tax of 15%, while there will be no capital gains tax for sale of units beyond three years.

Other conditions for distribution of cash flows include; At least 90% of distributable cash flow of the SPV is to be distributed to the Invit in proportion to its holding in the SPV, at least 90% of distributable cash flow of the Invit is to be distributed to the unit holders and Dividend declared to be paid within 15 days and distributions to the unit holders to be made on a half yearly basis.

Even after concession period of initial projects are complete, the fund will continue and is free to acquire any project from the sponsor or from non sponsor and can leverage its balance sheet and raise debt at levels lower than its IRR to generate better returns for unit holders.

Approval from all unit holders regarding the delisting of the trust has to be taken. Votes cast in favour of delisting of the trust should not be one and half times more than the vote cast against the resolution.

The trust is required to have and maintain a minimum of 20 unit holders forming part of the public, each holding not more than 25% of the aggregate amount of the units on a post-Issue basis. Failure will result in delisting of the units by the regulator.

The Offer details

The units are offered at a lower price of Rs 100 and at higher price of Rs 102 each unit. Minimum application is to be made for 10,000 units (i.e., Rs. 10 lakh plus) and in multiples of 5000 units (Rs 5 lakh plus). Issue opens for subscription on 3rd May and closes on 5th May, with anchor bid to open on 2nd May. Post listing, these units will have a trading lot of 5,000 units and will be listed on the BSE and NSE.

The issue comprises fresh issue of Rs 4300 crore and offer for sale of 3.48 crore units, which at the higher price band of Rs 102, works out to Rs 354.56 crore, thus making the total size of the issue of around Rs. 4655 crore, with an option to retain 25% of the offer size oversubscription.

IRB will also be beneficiary of such value creation as it will be holding the mandatory 15% unit-holding (three-year holding period) and monetize the remaining units through the offer for sale and would receive around Rs 1700 crore of net proceeds.

IPO proceeds will be utilized towards repayment of loan availed by the project SPV from lenders, prepayment of subordinate debt provided to the project SPV by sponsor and prepayment of unsecured loans and advances availed by the project SPV from sponsor and certain members of the sponsor group.

Valuation

The average return on net worth based on the combined financial statements of the last three years, i.e., for FY 2014, FY 2015 and FY 2016, is -4.2%, -6.5% and -2.35%. The average net worth stood at -0.72% for the nine months ended December 2016.

Future earnings of all these road projects are based on the daily traffic volumes, inflation and regulatory changes. Toll pricing is linked to WPI movement and can get affected in periods of negative WPI changes. The trust will follow factoring of WPI in the pricing of the projects.

The trust has acquired six projects that are already in operation and generating revenues at a CAGR of above 11%. Based on the future projections of cash flows by the trust, it will generate IRR of around 12.5% every year. The debt-free Invit to start with will also increase its ability to raise debt and then to add assets at a similar 12.5% IRR.

The equity valuation (including the sub-ordinate debt) at which the assets are to be transferred from the sponsor to Invit is at around 1 times P/BV. A road traffic growth of around 5% is projected in arriving at the future cash flows of Invit, which is reasonable.

The enterprise value, after considering the net debt at Rs 4745 crore, at a higher price of Rs 102 per unit, is Rs 5921 crore. The enterprise value at the offer price of units will facilitate raising further debt equal to its value at concessional rates.

The present issue is the first initial public offer of units of an infrastructure investment trust registered under the InvIT Regulations in India. There are no listed infrastructure investment trusts in India. Hence, no comparison is available in terms of issue price and valuations.

Assuming 90% of profit being distributed every year to investors and assuming Invit earns 12.5% of IRR every year, the yield in hands of investors will be around 11% fixed plus the appreciation of the units based on the macro economic conditions of India and toll collections of the road portfolio.

A successful Invit listing for IRB opens up the window for other road developers to exit completed projects and churn their equity/deleverage balance sheet and will also spur interest from the NHAI to award more BOT projects vs. Engineering, procurement and construction/ hybrid annuity model) as bidding interest will be higher as developers will now have an exit option.

Returns to unit holders

Based on the projected cash flows given in the prospectus, IRB Invit fund expects to yield tax free dividend of around 9.5-10% annually to non-institutional investors (after deducting dividend distribution tax), subject to the projected cash flows materialising. However, there is no guarantee of returns and returns are not fixed and will vary deepening on the actual cash flows.

Capital gains from the units are possible if post listing investors are willing to buy the units from the market at a lower yield due to the prevailing lower interest rate regime. However, in case of rising interest rate scenario, there can be capital losses if one tries to exit by selling the units in the market.

One can also expect capital gains if the projects perform better than the projections and, thus, yielding higher than projected returns and vice versa.

Capital gains are also possible if the fund is able to raise debt at lower interest rates and is able to acquire higher IRR projects.

Capital losses as well as lower yields will accrue if any of the fund's projects face any problem and suffers losses or lower cash flows than expected.

To sum up

The units are neither pure equity nor pure debt and have mixed features of both.

In view of the prevailing low interest rates, higher risk appetitive and expected acceleration in GDP growth rate, the timing is right to launch this new instrument and should benefit the issuer as well as investors.

IRB Invit Fund: Issue highlights

Offer for sale (in Rs crore)
- On lower price band347.60
- On upper price band354.56
Total Issue size for offer for sale ( in no of units in crore)3.48
Fresh Issue ( in Rs crore)4300.00
Price band (Rs)100-102
Issue open date03-05-2017
Issue closed date05-05-2017
ListingBSE, NSE
  

IRB Invit Fund: Consolidated Financials of Project SPVs

 1403(12)1503(12)1603(12)1612(09)1512(09)
Net Sales745.20900.25986.72734.99731.09
OPM (%)89.8%80.9%83.7%82.8%83.0%
OP669.54727.96826.23608.56606.86
Other in. 17.2916.1117.1116.2012.95
PBDIT686.83744.07843.34624.76619.81
Interest375.59444.84434.82309.79328.99
PBDT311.24299.23408.52314.97290.82
Dep.356.39425.37467.58320.38351.38
PBT -45.15-126.14-59.06-5.41-60.56
EO 0.000.000.000.000.00
PBT after EO-45.15-126.14-59.06-5.41-60.56
Tax (including Deferred Tax)2.39-2.3717.307.642.39
PAT-47.54-123.77-76.36-13.05-62.95
MI and share of associates0.000.000.000.000.00
Total PAT-47.54-123.77-76.36-13.05-62.95
Figures in crore
Source: Capitaline Database

IRB Invit Fund: Projected Consolidated Financials of Project SPVs

 1803(12P)1903(12P)2003(12P)
Revenue from operations1078.171176.221291.09
O&M expenditure184.02198.53242.17
Invit Expenses15.1315.5616.10
Ebidta879.02962.131032.82
Depreciation555.37609.28670.58
Interest58.2550.3742.85
PBT 265.40302.48319.39
Tax (including Deferred Tax)1.014.0311.21
PAT264.39298.45308.18
(P): Projections, Figures in crore
Source: Offer document

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 Rating Reckoner
Rating range Risk-return profile Recommendation
51 or above Low risk, moderate to High return Must subscribe
45-50 Low risk low return or Moderate risk, moderate/high return May subscribe
40-44 High risk high return Avoid, however active risk seekers can try
Below 40 High risk, low/moderate return, Moderate risk low return Do not subscribe