IRB InvIT – IPO Note – Indian Markets

What is InvIT ?

InvIT is an acronym for Infrastructure Investment Trust.  This is a new type of financial product in the market place.  The first InvIT to be launched in the market is from IRB Infrastructure Developers, one of the largest road developers in India.  They have number toll road projects across India.

InvIT is a quasi-debt product in the sense that though the returns are not guaranteed it would be very similar to regular recurring income.

IPO Details

Introduction: The IRB InvIT is the first InvIT to be issued in the Indian markets. IRB Infrastructure Private Limited is the Investment Manager. They have selected six key projects from their existing portfolio distributed over Rajasthan, Gujarat, Maharashtra, Karnataka and Tamil Nadu. These projects have been operational for between 4 to 8 years now with gross revenues of 1000 crores in FY16. Through the InvIT structure IRB seeks to raise capital for these existing projects and in turn promises to distribute the net distributable cash flows (NDCF) to the Investors.

The investment has to be made through the ASBA route.  That is, when you submit the application, the amount would be blocked from your account.  Depending on the quantum of allotment, the actual debit would happen from your account and the block for the rest of the amount would be removed.

Project Financials:  The Investment Manager has projected a turnaround in the financials from a loss of 76 Crore INR in FY16 to a profit of 308 Crore INR by FY20. The main savings come from the reduction in the interest burden since the existing debt will be transferred to the SPV which has a better credit rating (AAA) than the current promoter.

Tax Treatment:  As per the regulations at least 90% of the distributable cash flow of the InvIT should be distributed to the unit holders. Dividends should be paid within 15 days and the distribution should be made on a half yearly basis. The tax treatment for the unit holders is as follows

• Dividend income distributed by the trust is exempt in the hands of the unit holders
• Long term capital gains where the units are held for more than 36 months would be tax exempt, while short term capital gains would be taxed at 15%
• Interest income received directly by the unit holders, if any, would be taxable

In addition the dividend and interest received by the trust from the SPV would also be tax exempt. Overall the tax treatment is favourable for the investors

Key Risks: The two main risks are pricing risks (Toll prices are linked to WPI. Average WPI Inflation over the last 10 years is 5.5%) and operational risks (projected volume in traffic) is not met. In addition there may be political/social risks as in some places in India there has been local unrest/protest over high tolls. This may accelerate over time with the increase in toll.

Our Recommendation: The IRB InvIT has a high quality set of projects with predictability in cash flows. The tax treatment is also favourable for the investors.  With the projected yields in the range of 10%-12%, there would be heavy demand for this.  The allotment ratios are expected to be smaller.  With the current yields on debt instruments moving southwards, there is a big appetite in the market for these high yielding assets.  There is a possibility of higher price at listing and consequently capital gains on listing is possible.

It would be considered as a quasi-debt product with attractive tax arbitrage, as the dividends are exempted from tax.

The large issue size as well the listing on the exchange would provide sufficient liquidity. Our recommendation is for investors who can invest the minimum 10 lakh INR to subscribe to this IPO.

Go ahead and participate in the first InvIT launched in India, if you can set aside Rs10 lakhs!