Also read our take on the The best REIT in India
What is an InvIT: The lowdown on Infrastructure Investment Trusts
InvITs are investment vehicles that own & manage infrastructure assets like roads, power plants, transmission lines, warehouses, ports, etc.
The trust collects money from investors to invest in long-term revenue-generating assets. It enables individual investors to invest in large infrastructure projects to earn profits in the form of dividends & capital appreciation. InvITs usually get listed on stock exchanges through an IPO. This serves as a channel to raise equity & debt from the capital markets. The capital is used for growth by acquiring more assets.
Three main parties are involved in an InvIT: Sponsor, Investment manager & Trustee. Each of these players has a crucial role to play in the running of an InvIT.
Sponsor: An InvIT can only be established by a sponsor & cannot have more than three sponsors.
- The sponsor should have a net worth of 100 Cr.
- Should have 5Y experience in the development of infrastructure or fund management.
- A minimum stake of 15% in the InvIT
Investment Manager: Responsible for asset management activities like investments & divestments.
- Should have a net worth of 10 Cr
- 5Y experience in fund advisory or infrastructure development
- If the sponsor or the investment manager is not Indian-owned, then any investment by the InvIT will be considered foreign investment.
The Trustee: Responsible for holding the assets of the InvIT for the benefit of the unit holders. The Trustee supervises the activities of the investment manager and the project manager.
Project Manager: This entity is appointed by the Investment manager. It is responsible for managing the assets of the InvIT & to ensure that projects get completed on time.
The case for InvITs
Three reasons why investors should consider InvITs as an asset class.
- Predictable cash flows: As per SEBI, InvITs must invest at least 80% of their assets in completed & revenue-generating projects. An InvIT should not invest more than 10% in under-construction projects. This ensures predictable cash flows & maintaining healthy financials.
- High DPU: SEBI requires InvITs to distribute a minimum of 90% of their net distributable cash flows to investors. This results in high distribution per unit (DPU) or, simply put, dividends.
- Blend of Debt & Equity: The regularity of payments gives it a touch of a debt instrument. At the same time, the unit-holder participates in the company’s growth trajectory much like an Equity investor. The growth comes from capital gains, increasing DPU & new asset acquisitions.
What should you look for in InvIT?
The traditional valuation metrics like PE, EPS growth, Margin expansion, etc., do not apply here. There are specific parameters to consider while evaluating InvITs. Let’s understand each of them.
Underlying assets
InvITs are more diverse than REITs. In general, REITs only deal with commercial real estate assets. However, InvITs can hold any commercial asset across Roads, Power, Railways, Warehouses, Airports, Data centres, Telecom towers, etc.
Understandably, different assets will have different risks & risk prospects. For example, Power transmissions are more predictable in terms of cash flows than Airports. Similarly, telecom tower assets are more predictable than a warehouse.
The InvITs with a better asset profile will command a premium over the others.
The average tenure of the assets / Concession period
A concession period is when a company or organization has the right to operate and maintain a specific infrastructure asset, such as a toll road or an airport. In the case of INVITs, or Infrastructure Investment Trusts, the concession period refers to the length of time that the trust has the right to operate and maintain the underlying infrastructure assets. The higher the concession period, the better.
Loan To Value
Loan to Value (LTV) measures how much debt was borrowed compared to the underlying asset value. For example, if a company is acquiring an asset worth 1000 Cr with a 700 Cr loan, the LTV ratio would be 70%. Just like any other business, the low leverage, the better.
Dividend Yield
Dividend yield refers to the annual income that an InvIT is expected to generate, expressed as a percentage of the INVIT’s current market value. For example, if an InvIT has a current market price of 100/- and is expected to generate 5/- in annual income, its current yield would be 5%. The higher, the better.
Assets pipeline / Right of first offer (ROFO)
The assets pipeline of an InvIT refers to the potential investments that the InvIT is considering or acquiring. A strong assets pipeline indicates a higher growth potential. On the other hand, a weaker assets pipeline may indicate that the InvIT has fewer opportunities for investments & growth.
Net Asset Value
NAV is one of the best ways to assess InvITs. Think of it like a Book value per share. It is calculated as the estimated market value of the properties minus all liabilities. This is divided by the number of shares outstanding. NAV is a more accurate way to determine the share price of InvIT.
Many times, InvITs tend to trade below or above NAV. This happens because of the supply & demand of the traded units. In such cases, we must keep an eye on the share price distance from NAV.
Sponsor
A strong sponsor will have many advantages like brand recognition, trust factor, on-time delivery, etc. InvITs will also have the right of first offer (ROFO) on properties owned by the sponsors.
Taxation
The cash distributed to the unit holders is a combination of three parameters – Interest income, Dividend income & Repayment of debt. Taxation works the same for all InvITs except for Dividend income. It depends on the tax regime the SPVs had opted for. Unit-holders are taxed at the same rate at which InvITs are taxed. InvITs having the highest nontaxable portion of NDCF are likely to gain higher interest among investors.
How to invest in InvITs in India
You can buy units of InvITs just like shares through regular trading accounts on BSE and NSE, the major exchanges. The image below shows BSE and NSE codes for the three InvITs.
Before arriving at our overall recommendation, a brief note on each InvIT to understand similarities and differences.
PowerGrid InvIT
NSE Code: PGINVIT-IV | BSE Code: PGINVIT
Power Grid Corporation of India sponsors PowerGrid InvIT. PGCIL is India’s largest power transmission company, with 3,698.5 ckm transmission lines & 257 sub-stations. The company was conferred with ‘Maharatna’ status in 2019. GoI owns a 51.3% stake in the company.
PowerGrid InvIT owns, constructs, operates & maintains power transmission assets in India. This is India’s first PSU InvIT & second listed power transmission InvIT after IndiGrid InvIT.
*Source: Power Grid InvIT H1FY23 Investors presentation
Critical features of PowerGrid InvIT
- The current AUM is at 10,384.8 Cr across five transmission lines
- No development risk. The initial portfolio assets are fully operational & revenue-generating
- The company had historically maintained above 98% availability
- As per the TSA (transmission service agreement), the tariffs are not linked to the power transmitted but to the availability of the grid. This ensures consistency in the cash flows
- All the assets are built under the BOOM (Build, Own, Operate & Maintain) model. It gives perpetual ownership of the asset to the Trust. Unlike roads that are transferable back to the government after the period of the toll-collecting concession
- The average tenure of TSA is 30 years & extendable up to 50 years
- The transmission charges are pooled by CTU (Central Transmission Utility) & paid to licenses. Hence reducing the counterparty risk
- Low debt InvIT with AAA credit rating
*Source: Power Grid InvIT Q2FY23 Investors presentation
IndiGrid InvIT
NSE Code: INDIGRID-IV | BSE Code: INDIGRID
IndiGrid InvIT is the first listed power InvIT in India. It is sponsored by KKR & GIC. The company’s portfolio comprises 42 transmission lines with ~7,790 ckms length, 12 substations with ~14,450 MVA transformation capacity, and 100 MW (AC) solar generation capacity.
The company has been aggressive in acquiring new assets. Since its listing in 2017, IndiGrid has grown from 2 power transmission projects to 14 power projects. The AUM had increased 5x from 3600 Cr to 21,100 Cr as of FY22.
*Source: IndiGrid Q2FY22 Investors presentation
Key features of IndiGrid InvIT
- It is one of the fastest-growing InvITs in India. In the last five years, the revenue has grown by a CAGR of 49%
- It generated a total return of 16% CAGR since listing & DPU had grown by 4% yearly.
- The company had historically maintained above 99.5% availability (more than PGINVIT at 95%)
- The average tenure of TSA is ~29 years.
- It has a strong asset pipeline and looking to increase its AUM to 300,000 Cr in the next few years
- The company is slowly diversifying into other power sources like Solar. In 2021, it acquired its 100% stake in two solar assets with a cumulative capacity of 100 MW
*Source: IndiGrid Q2FY22 Investors presentation
IRB InvIT
NSE Code: IRBINVIT-IV | BSE Code: IRBINVIT
IRB Infrastructure Developers sponsor IRB InvIT. It is the only listed InVIT in India that owns Highways & Road assets. The company has a portfolio of 6 operational assets, aggregating more than 12,000 lane Kilometers. It is the largest by any private highway infrastructure developer in India.
The company operates in a build-operate-transfer (BOT) model. At the end of the concession period, the assets will be transferred to NHAI. The assets are spread across different states like Maharashtra, Gujarat, Rajasthan, Karnataka, Punjab & Tamil Nadu. It commands a 20% share in the Golden Quadrilateral project (four assets part of the Golden Quadrilateral corridor with one asset on the East-West corridor).
*Source: IRB InvIT Q2FY23 Investors presentaiton
Key features of IRB InvIT
- The company’s revenues are dependent on toll collections. Any construction of alternate routes or cancellation of tolls (like the Noida Toll Bridge) will adversely impact the company’s revenues. Hence, the cashflows are more volatile than power transmission InvITs like PGINVIT & INDIGRID.
- Since its IPO, the InvIT has failed to live up to expectations, which has sent its stock price crashing from a listing price of Rs. 102/ to a low of Rs. 27.2/-. When the InvIT was first launched, the expected internal rate of return on the InvIT was between 13-14%. However, two of the trust’s toll projects (Jaipur-Deoli and Pathankot-Amritsar) haven’t been able to collect as much toll as expected.
- On top of this, the concession period for Bharuch Surat and Surat Dahisar projects ended on March 2022 and May 2022, respectively. The trust had transferred these assets to NHAI
- The remaining concession life of the underlying assets is at ~17 years. The Omalur – Salem – Namakkal BOT Project, which contributes 12.2% of overall toll revenue, will end its concession period in Jan 2027
*Source: IRB InvIT Q2FY23 Investors presentaiton
Which is the best InvIT to invest in?
All three are well-managed trusts with solid balance sheets—however, some exhibit better performance than others on a few parameters.
- IRBINVIT is not a strong contender for the best InvIT. The average concession period is only 17 years. The management hasn’t guided for any new acquisitions yet. Hence, it trades at a much discount to NAV compared to its peers.
- Both the power transmission InvITs (PGINVIT & INDIGRID) have better growth visibility & consistency in cash flows when compared to IRB InvIT.
- IndiGrid had a proven track record of acquiring new assets & delivering 36% CAGR of Net Distribution Cash Flow.
- Being backed by PSU, the PGINVIT has access to lower cost of debt at 7% as compared with others at 7.25 to 7.5%
- PGINVIT is trading at a premium of 46% over its NAV, as compared with IndiGrid, which is trading closer to its NAV
The Verdict
The answer varies depending on your context as an investor.
Power Grid INVIT, if you are conservative and taking a debt investors’ point of view. Power Grid initially transferred 74% of ownership to PowerGrid InvIT at the time of its IPO. PGINVIT will also acquire the remaining 26% stake in the SPVs in the next 1-3 years. The company has to raise debt to fund these acquisitions. This will increases the finance costs & decrease the net distributable cash flow (NCDF).
IndiGrid InvIT if you are a growth investor looking for capital appreciation. Considering the growth guidance of 30,000 Cr AUM, increasing DPU, better yield, and high sponsor shareholding, the company is on a growth track for the next 3-5 years.
Taking a holistic view, IndiGrid InvIT is better placed to capture the growth & provide decent stability in the cash flows.
*Click on the image to enlarge
In the order of preference, we like:
IndiGrid InvIT > Power Grid InvIT > IRB InvIT
Why are InvIT stocks falling? Should you buy now?
InvITs are interest rate sensitive. On an upward rate cycle, their cost of borrowing increases as they have to raise debt at a higher rate. It will impact their leverage profile & overall profits. They will go slow on debt-financed acquisitions.
In 2022, RBI gradually increased the Repo rate from 4% to 6.25% as of Dec 2022. The yields InvITs were offering (7-8%) were not attractive for the investors as the banks were offering above 7%. Hence investors shied away from InvIT, which trigged a 15-20% fall across all three listed players.
However, this can be a short-term phenomenon. Once the interest rate starts to go down, we can see a bump-up in InvITs. If you have a long-term horizon and looking to build an INVIT basket, this can be a good opportunity to accumulate slowly.
Other relevant reading:
- Which is the best REIT in India?
- Power Grid INVIT: Should you invest?
- IRB InvIT: The first listed InvIT
NOTE: This article is for informational purposes only and should not be considered investment advice.
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