Introduction:
Infrastructure Investment Trusts (InvITs) have become instrumental in shaping India’s investment landscape, providing a unique avenue for investors to participate in the country’s infrastructure development.
Understanding InvITs:
Infrastructure Investment Trusts represent a significant evolution in India’s financial framework. These regulated investment tools, overseen by the Securities and Exchange Board of India (SEBI), serve as conduits for pooling funds from various investors. The purpose is twofold: to provide investors with stable returns and capital appreciation while contributing to the country’s infrastructure growth.
Among the diverse range of InvITs, our focus narrows down to IRB InvIT Fund and PowerGrid Infrastructure Investment Trust. IRB InvIT Fund stands as a stalwart in the road sector, while PGInvIT has solidified its position as a key player in power transmission. Both entities epitomize excellence, offering a nuanced understanding of their respective roles in India’s infrastructure development.
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As we delve into the narratives of IRB InvIT Fund and PowerGrid Infrastructure Investment Trust, our objective is to provide a comprehensive evaluation in the current situation.
IRB InvIT:
Overview:
IRB InvIT Fund is an Infrastructure Investment Trust (InvIT) focused on the road sector in India. Established to facilitate investment in infrastructure projects, InvITs like IRB aim to attract low-cost, long-term capital to support the development and maintenance of critical assets.
Business Portfolio:
IRB InvIT operates and maintains a diversified portfolio of toll road concessions in six Indian states, including Maharashtra, Rajasthan, Karnataka, Tamil Nadu, Punjab, and Gujarat. The total lane kilometers under tolling and operations amount to 2,439. The portfolio comprises five BOT (Build-Operate-Transfer) assets and one HAM (Hybrid Annuity Model) asset, showcasing geographical diversity and different traffic densities.
Financial Performance:
IRB InvIT reported robust financial performance for Q2 FY24. Total consolidated revenue reached Rs. 258 crores, reflecting a notable increase from the corresponding quarter of the previous year. Toll revenues showed a substantial growth of 10%, reaching Rs. 218 crores. EBITDA for the quarter stood at Rs. 214 crores, indicating operational efficiency, and Profit After Tax reached Rs. 88 crores, showcasing profitability. The DPU is Rs. 2 for Q2. NPV is ~Rs. 100. AUM is around Rs. 8244 Crs and Net debt to asset is around 0.2775:1.
Tariff Revisions and Revenue Growth: The trust reported tariff rate revisions for key projects, with a 1.2% revision for the Omalur Salem project and a 5% revision for Tumkur Chitradurga, Jaipur Deoli, Pathankot Amritsar, and Talegaon Amravati projects. Despite challenges during festival holidays, toll revenue demonstrated an impressive 10% growth compared to the previous year.
Distribution and Commitment to Unitholders: IRB InvIT Fund declared a distribution of Rs. 2 per unit for the quarter ended September 30, 2023, emphasizing the commitment to providing regular returns to unitholders. The management reaffirmed its dedication to maintaining the current distribution while actively evaluating potential investment opportunities. At Rs. 70, the DPU yield is around 11.5%.
Debt, Credit Ratings, and Capacity for New Assets: The trust’s financial position remains strong, with a net debt to value of assets reported at 0.3:1. AAA credit ratings from CARE and India Ratings underscore the trust’s creditworthiness. This financial stability positions IRB InvIT favorably for potential acquisitions, and the management highlighted sufficient debt capacity for acquiring new assets.
Project-Specific Insights:
• Tumkur Chitradurga Arbitration: The arbitration matter is in an advanced stage, with expectations of conclusion by the end of June. This development holds significance for the trust’s overall financial health.
• Deferred Premium and Cash Position: Tumkur Chitradurga’s outstanding deferred premium obligation, including interest, is close to Rs. 600 crores as of September 30. The cash and bank balance, including Debt Service Reserve Account (DSRA), is close to Rs. 240 crores, providing transparency into the project’s financial standing.
• Force Majeure and Compensation: The clarification that Talegaon Amravati is not eligible for compensation under Force Majeure provisions highlights the importance of understanding contractual aspects and potential impacts on revenue.
• Private InvIT and Retail Investor Considerations: The Private InvIT, in which IRB owns a 51% stake, is currently deemed unsuitable for retail investors. However, the recent distribution announcement of Rs. 155 crores for Private InvIT in the board meeting adds a noteworthy dimension. Retail investors are advised to wait until the Private InvIT decides to go public for potential investment opportunities.
Strengths:
1. Diversification: The company boasts a diversified portfolio, minimizing risks associated with regional or traffic concentration.
2. Strong Sponsorship: Backed by IRB Infrastructure Developers Ltd., a leading Indian road developer, IRB InvIT benefits from a strong sponsor with a proven track record.
3. Operational Excellence: The company has demonstrated operational excellence, leading to consistent dividend payouts.
4. Growth Prospects: Positioned to benefit from increasing traffic volumes and government initiatives in the infrastructure sector.
Weaknesses:
1. Financial Sensitivity: Exposure to interest rate fluctuations and economic cycles poses risks to the trust’s financial performance.
2. Regulatory Risks: The toll road sector is subject to regulatory uncertainties, which could impact the company’s operations and revenues.
3. Debt Dependency: Dependence on external sources for debt financing introduces financial risk.
Threats:
1. Competition: Intense competition from other players in the infrastructure sector could affect market share and profitability.
2. Project Delays: Unforeseen circumstances or delays in project implementation might impact revenue streams.
3. Regulatory Changes: Changes in government policies or regulations could pose a threat to the company’s operations.
Recent News Update:
Recent data reveals that among IRB InvIT’s various projects and special purpose vehicles (SPVs), key contributors to toll collections include the Mumbai Pune Expressway & Old Mumbai Pune Highway
(NH4), Hyderabad Outer Ring Road, and Ahmedabad Vadodara Expressway. In a notable development, IRB Infrastructure Developers reported a substantial 20 percent year-on-year increase in gross toll collections for November. The company achieved toll collections amounting to Rs 437.05 crore in November, compared to Rs 366 crore in the same period the previous year. Despite a brief slowdown in economic activities during the festival holidays, IRB Infra’s toll collections surged.
Opportunities:
• Retail participation increase because of maturity of the market.
• Cash has been increasing from Q-Q.
• An increase in WPI leads to a corresponding increase in toll rates, protecting the concessionaire (like IRB InvIT) from the erosion of their revenue due to inflation.
• Healthy toll collects growth.
Overall Analysis:
IRB InvIT is a well-established player in the Indian toll road sector, boasting a diversified portfolio and a strong track record. With potential growth opportunities and support from a reputable sponsor, the company is well-positioned to benefit from the ongoing development in the infrastructure sector. The recent surge in toll collections reflects IRB InvIT’s financial performance and operational resilience positively. The company’s ability to maintain growth momentum, even during a period of softened economic activities, is commendable. This development further reinforces the strength of the company’s toll road portfolio and its capacity to generate revenue consistently. The InvIT has produced stable DPU and the debt is manageable at 22% along with the positive outlook for increase in traffic due to an increase in vehicle sales in the coming years give a positive outlook for the InvIT.
Powergrid Infrastructure Investment Trust:
Company Overview:
PowerGrid Infrastructure Investment Trust (PGInvIT) is a major player in the Indian power transmission sector, sponsored by Power Grid Corporation of India Ltd. The trust focuses on owning, operating, and maintaining power transmission assets across India.
Financial Snapshot: PowerGrid Infrastructure Investment Trust (PGInvIT) demonstrated a robust financial performance in the reported period, with notable year-over-year growth across key financial metrics. The revenue witnessed a substantial increase of 10.5% to INR 3,256.27 million, propelled by elevated transmission charges and revenue from newly acquired assets. The Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) also exhibited a noteworthy YoY surge, rising by 12.2% to INR 2,547.53 million. Maintaining operational efficiency, the EBITDA margin remained steady at approximately 78.3%. Profit After Tax (PAT) experienced a commendable YoY growth of 13.1%, reaching INR 1,944.72 million, with a marginal improvement in the PAT margin to 60.0%, indicative of enhanced cost management. Furthermore, the Net Debt/AUM Ratio decreased to 1.22% as of September 30, 2023, underscoring a resilient balance sheet and prudent debt management practices. The DPU is Rs. 3 for Q2. AUM is around Rs. 8590 Crs and NAV is around Rs. 86. At Rs. 95, the DPU yield is around 12.6%.
Asset Portfolio:
As of June 30, 2023, PGInvIT manages a diverse portfolio comprising seven operational power transmission assets, spanning approximately 4,081 km. These assets, strategically located across 18 states and 1 Union Territory, include Inter-State and Intra-State Transmission System projects.
• 100% in Vizag Transmission Ltd. (PVTL): PGInvIT acquired the remaining 26% stake in PVTL in FY23.
• 74% in four SPVs: These are the initial portfolio assets acquired in May 2021 through the IPO proceeds.
Strengths:
1. Strong Sponsorship and Diversification: PGInvIT’s affiliation with Power Grid Corporation of India Ltd. provides a solid foundation and perpetual ownership (35-year contract). The trust mitigates risks through a diversified portfolio spread across regions and voltage levels.
2. Stable Cash Flows: Revenue stability is secured through long-term contracts with fixed tariffs, ensuring consistent cash flows for distributions.
3. Growth Potential: PGInvIT is well-positioned to capitalize on India’s growing power sector, with plans for strategic acquisitions and expansion.
Weaknesses:
1. Regulatory Risks: The trust is exposed to regulatory changes in the power sector, potentially impacting tariffs and profitability.
2. Interest Rate Sensitivity: PGInvIT faces sensitivity to interest rates as revenue is linked to electricity tariffs influenced by interest rate fluctuations.
Threats:
1. Competition: Intensifying competition in the power transmission sector may exert pressure on tariffs, requiring effective strategic positioning.
2. Project Execution Delays: Delays in project execution pose a threat to cash flows and overall profitability, necessitating robust project management.
3. Economic Downturn: An economic downturn leading to lower electricity demand poses a threat to revenue and distributions, requiring adaptability.
Quarterly Performance:
The reported consolidated quarterly numbers for September 2023 highlight a nuanced performance. While net sales experienced a marginal decline of 1.83%, the net profit and EBITDA exhibited substantial growth, showcasing the trust’s ability to navigate challenges and capitalize on opportunities.
Cause for recent downtrend:
1. 26% stake remaining in 4 SPVs and no clear direction from management regarding their acquisition.
2. Its parent, PGCIL hasn’t transferred any asset and no guidance is available.
3. Availability of new assets from outside is also a question.
4. All these factors have caused a fear of stagnation of asset growth.
5. In Aug 23 NDCF was Rs, 261 Cr but Rs. 273 was paid as DPU which means that they dipped into their cash reserve to maintain stable DPU of Rs. 3.
6. NAV is lower than the current market price hence fear of being overvalued.
Opportunities:
1. Extremely low debt hence opportunity for future better acquisitions.
2. Push from government, there are Rs. 30000 Cr worth projects in construction phase.
3. Waiting for lower interest rate hence the cost of capita lower.
Conclusion:
PowerGrid Infrastructure Investment Trust presents a compelling investment opportunity, with a strong financial performance, stable cash flows, and strategic growth initiatives. PGInvIT’s responsiveness to market dynamics and commitment to sustainable practices will be critical for sustained success in India’s dynamic power sector. The recent quarterly performance signals resilience and adaptability, reinforcing the trust’s position as a key player in India’s infrastructure investment landscape. The invIT compared to its peer IndiInvIT has very low debt and potential to increase leverage in order to pursue a more aggressive AUM increase leading to higher DPU hence this InvIT is a better option for conservative investors.
Final verdict:
Both IRB InvIT and PGInvIT offer distinct value propositions in India’s infrastructure investment landscape. IRB InvIT’s stronghold in the toll road sector aligns with the country’s burgeoning infrastructure needs. On the other hand, PGInvIT’s pivotal role in power transmission positions it at the forefront of India’s energy development. These 2 InvITs provide an opportunity to for investors to participate in the country’s growing infra drive but Investors should carefully weigh the strengths, weaknesses, and opportunities of each InvIT to make informed investment decisions based on their risk profile. As India continues its march toward infrastructural excellence, these InvITs stand as gateways for investors seeking to be part of the nation’s transformative journey.
Disclaimer:
This article should not be construed as investment advice, please consult your Investment Adviser before making any sound investment decision.
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