Which is the best InvIT in India? – Capitalmind

This article has been updated as of September 2024, authored by Krishna Appala and Sidhanth Paul.

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.

NSE also launched an index back in April 2023, tracking the performance of REITs and InvITs that are publicly listed on the Indian bourses. The index is called Nifty REITs & InvITs and the following are its InvIT constituents:

*Source: NSE_InvIT_REIT_Factsheet

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. After the finance bill 2023, all the three above mentioned parameter comes under ‘Income from Other Sources’. This effectively made all the components of income distributed by a InvIT to its investors taxable at slab rate.

However, not the total income from ‘repayment of debt or other sources‘ is taxed but ‘specified sums‘ received by unitholders would be subject to tax at slab rates.

The specified sum can be calculated by:

•  Start by summing up all the income distributed by the REIT/InvIT from sources other than dividend, interest or rent up to the current year (the year for which tax is being calculated).
• Next, deduct the original issue price of the REIT/InvIT units (this would be the IPO price for public investors).
• Only the amount remaining after this deduction is taxed as “income from other sources.
  Note: Before the finance bill led to the above mentioned changes, taxation was an important metric to analyze REITs considering the tax free distribution. However, its not the case anymore.

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.

PowerGrid InvIT

PowerGrid InvIT is sponsored by the Power Grid Corporation of India . PGCIL is India’s largest power transmission company, with 1,77,790 ckm transmission lines & 278 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. It is also India’s first PSU InvIT & second listed power transmission InvIT after IndiGrid InvIT.

*Source: Power Grid InvIT Q1FY25 Investors presentation

Critical features of PowerGrid InvIT

• It currently operates 3,699 ckm of transmission lines and 3 sub stations. The current Net Debt/AUM is at 0.26%, giving them enormous headroom for a debt funded acquisition strategy going forward.
• 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 is of 28 years.
• The transmission charges are pooled by CTU (Central Transmission Utility) & paid to licenses. Hence reducing the counterparty risk.
• A project of 400 kV line bay has been allotted to PowerGrid Parli Transmission Ltd, expected to be implemented by Q3 FY25.

*Source: Power Grid InvIT Q1FY25 Investors presentation.

The InvIT has also initiated discussions with its sponsor vis-a-vis the balance 26% stake the sponsor holds in 4 of its assets. This stake is expected to be transferred to the trust, growing the quantum of cash flow generation.

In terms of new assets acquisitions,  the sponsor presently prefers securitization over monetization of its assets through InvIT (stated in investor presentation). Hence, we do no expect any new assets to come into they kitty, in the near term.

IndiGrid InvIT

IndiGrid InvIT is the first listed power InvIT in India. It is sponsored by KKR & GIC. The company’s portfolio comprises 49 transmission lines with ~8,700 ckms length, 15 substations with ~22,550 MVA transformation capacity, and ~1.1 GW 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 15 operational power transmission projects and 18 operational solar power generation projects. Its AUM has more than doubled since FY20, growing from 12,000 Cr to 29,300 Cr as of Q1 FY25.

*Source: IndiGrid Q1FY25 Investors Presentation.

Key features of IndiGrid InvIT

• In the last five years, its the revenue has grown by a CAGR of ~23%.
• Its quarterly distribution has historically grown at a CAGR of 6%.
• The company’s availability as of Q1 FY25 came at around 95.8%, with focus on maintaining it above 99.5% across its portfolio.
• The average tenure of TSA is ~26.3 years for transmission projects and ~19.3 years for solar projects.
• It currently has 5 under construction project, out of which 3 are transmission projects and 2 are for Battery Energy Storage System (BESS).
• The Net Debt/AUM is at ~61.3% with an average cost of debt as of Q1 FY25 at ~7.74%.

*Source: IndiGrid Q1FY25 Investors Presentation.

IRB InvIT

IRB Infrastructure Developers sponsor IRB InvIT. It is India’s first publicly listed InvIT, trading since May 2017. Initially, the trust held 6 operational road infrastructure assets, with a seventh asset added in September 2017. Since then, two assets have been handed back to NHAI.

IRB InvIT operates on a build-operate-transfer (BOT) model, where assets are transferred to NHAI at the end of the concession period. Its current portfolio consists of five BOT assets and one HAM (Hybrid Annuity Model) asset.

HAM is a project financing structure where both the government and the private player share the investment. Unlike the BOT model, where the private player collects tolls from users, in the HAM model, the private player receives a annuities from the government over a specified period of time

*Source: IRB InvIT Q1FY25 Investors Presentation.

*Source: IRB InvIT Q1FY25 Investors Presentation.

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’s DPU has seen a consistent drop from 10.55 per unit in FY18 to 8.00 per unit in FY24.
• Two if its projects, namely Bharuch Surat and Surat Dahisar 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 ~15 years. The Omalur – Salem – Namakkal BOT Project, which contributed ~13% of overall revenue in FY24, will end its concession period in Jan 2027.

*Source: IRB InvIT Q1FY25 Investors Presentation.

On future acquisitions part, HAM assets from the sponsor – VM7 (Pathankot – Mandi) and Chitoor-Thachur is expected to be completed by FY25 & FY26 respectively. Once completed, will be available for offer to the trust.

Bharat Highways InvIT

Bharat Highways InvIT is sponsored by Aadharshila Infratech Pvt Ltd (AIPL). AIPL offers testing services in the field of transportation, pavement design of roads and airports, physical and chemical testing of soil, lime, cement, road roughness testing, concrete and bituminous mix design of road projects. Also, NMHPL (associate of AIPL) is a road EPC company with 6 years of experience.

It is the most recent addition of the lot, listed in March, 2024. Its current portfolio comprises of 7 operational HAM projects, having a total lane length of ~2,134 km.

*Source: Bharat Highways InvIT Q1FY25 Investors Presentation.

Key Features of Bharat Highways InvIT

• It is India’s first ever HAM focused publicly listed InvIT. ~6,127 Cr of AUM as of FY24.
• The trust has received 42 annuities as of Q1 FY25, out of the total 210 due from its 7 HAM projects.
• Currently, its average residual concession period is of ~11.58 years.
• The trust is also in the process of adding its 8th asset, which is GR Aligarh Kanpur Highway Pvt Ltd (GAKHPL) covering total lane length of ~347 km.
• The asset under acquisition has a residual tenor of ~13.66 years as of Q1 FY25.

*Source: Bharat Highways InvIT Q1FY25 Investors Presentation.

Which is the best InvIT to invest in?

All four are well-managed trusts with solid balance sheets—however, some exhibit better performance than others on a few parameters.

• IRBINVIT and BHINVIT, both don’t seem to be strong contenders for the best InvIT. The average concession period is only 15 years & 11.5 years, respectively for them. Any new acquisition for IRB is expected to only come after a year or two whereas Bharat Highways have an acquisition under process, but that too has a residual tenor of ~13.66 years.
• Both the power transmission InvITs (PGINVIT & INDIGRID) have better growth visibility & consistency in cash flows as compared to the other two.
• INDIGRID had a proven track record of acquiring new assets & has delivered 33% CAGR of Net Distribution Cash Flow from FY20-24.
• INDIGRID also has the lowest cost of debt at ~7,74%, while PGINVIT is at 8.09% as of Q1 FY25.
• PGINVIT and INDIGRID, both are trading at a relative premium of 6.8% & 5.1% over its NAV as of FY24.

The Verdict

If you are a growth investor looking for capital appreciation, IndiGrid looks like the right bet for you. Considering factors like revenue growth, availability, increasing DPU, and high sponsor shareholding, the company looks to be on the growth track. Not to forget, the trust also has 5 projects under construction projects.

It’s Net Debt/AUM is on the higher side, however it enjoys the lowest cost of debt too.

Taking a holistic view, IndiGrid InvIT seems to be 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 > Bharat Highways InvIT

Do Interest Rate Cycles Affect InvITs??

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.

RBI gradually increased the Repo rate from 4% in Apr 2022 to 6.50% by June 2023 and has kept it unchanged since then.  The yields InvITs were offering (7-8%), here becomes unattractive for the investors as the banks are offering above 7%. Hence investors usually shy away from REITs.

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:

NOTE: This article is for informational purposes only and should not be considered investment advice.

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