IRB InvIT Fund IPO – Unique Investment Option – Should you invest?
IRB InvIT Fund IPO would open for subscription on 3rd May, 2017. IRB InvIT Fund is a registered infrastructure investment trust under the InvIT Regulations. This is the first trust formed under InvIT Regulations based on approvals from SEBI. It has unique business model. Many investors still have question in their mind whether this is New Fund Offer or IPO. What are the positive factors of IRB InvIT Fund IPO? What are the hidden factors in IRB InvIT Fund IPO? In this article, I would provide some interesting insights and hidden facts and do IRB InvIT Fund IPO Review.
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What is InvIT in India?
An InvIT is a trust that owns and manages income-generating infrastructure projects. It allows public investors to directly invest in such projects and returns a portion of the income to the investors.
About IRB InvIT Fund
They are a registered infrastructure investment trust under the InvIT Regulations. they primarily intend to own, operate and maintain a portfolio of six toll-road assets in the Indian states of Maharashtra, Gujarat, Rajasthan, Karnataka and Tamil Nadu. These toll roads are operated and maintained pursuant to concessions granted by the NHAI. they believe that, upon the listing of the Units on the Stock Exchanges, they will be the first listed infrastructure investment trust focused on toll-road assets in India.
Issue details of IRB InvIT Fund IPO
- IPO opens: 3-May-2017
- IPO closes: 5-May-2017
- Face Value: Rs 10 per unit
- Issue price band: Rs 100 to Rs 102 per unit
- Issue size: Rs 4,655 Crores
- Market lot: You need to apply for minimum lot of 10,000 units @ 100 to Rs 102 per unit. Means you need to invest Rs 10 Lakhs minimum. After listing you can sell them on stock exchanges in the lots of 5,000 i.e. Rs 5 Lakhs.
- Minimum investment: Rs 10 Lakhs on lower price band
- Leading Managers: IDFC Bank, ICICI Securities, Credit Suisse India and IIFL
- Listing: BSE / NSE
- Download IRB InvIT Fund IPO DRHP Prospectus at this link.
Objects of the IRB InvIT Fund IPO issue
The object of the issue are to:
1) Investment in the Project SPVs by way of an issue of debt
2) General purposes
3) Issue related expenses.
Company Financials (combined) – IRB InvIT Fund IPO
1) Financials are not comparable as this can be considered just like New Fund Offer (NFO). However here are the details of combined finanicials.
2) The company generated revenue of Rs 762 Crores for the year ended Mar-14 and Rs 1,003 Crores for the year ended Mar-16.
3) The company posted a loss of Rs 47.5 Crores for the year ended Mar-14 and loss of Rs 76.3 Crores for the year ended Mar-16.
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What are IRB InvIT Fund Key Strengths?
- Portfolio of income generating assets in key growth markets.
- Diversified road project portfolio and revenue base.
- Experienced Sponsor, Investment Manager and Project Manager with consistent track records in operating and maintaining projects in the roads and highways sector in India.
- Low leverage upon Listing, providing debt capacity to finance future growth.
- Experienced management team with industry experience.
- Growth opportunities and access to Sponsor’s portfolio.
- Attractive sector with strong underlying fundamentals
- It acquired 6 projects. It includes Surat-Dahisar Project (NH8), Bharuch Surat Project (NH8), Talegaon Amravati Project (NH6), Jaipur Deoli Project (NH12), Tumkur Chitradurga Project (NH4) and Omalur-Salem-Namakkal Project (NH7). While Surag-Dahisar and Bharuch-Surat project has concession period tenure till January 2022 and Omalur-Salem-Namakkal till August 2026, other projects have concession tenures ending in June 2037. Sponsor has 22 BOT road projects on hand as on 31st December 2016 out of which 14 are operational, 5 are under construction and 3 are under development. Futures of all these projects are based on the daily traffic volumes, inflation and regulatory changes. Trust will follow factoring of WPI in the pricing of the projects.
What are Trust key investment conditions ?
1) Invest at least 80% of the value of the assets in completed and revenue generating infrastructure assets.
2) Balance 20% can be invested in under-construction infrastructure projects and securities of infrastructure companies in India (cannot invest in units of other InvITs)
3) InvIT should hold (directly or through SPVs) the infrastructure assets for at least 3 years from the date of purchase of the asset by the InvIT (except investment in securities of infrastructure companies)
4) Investment into SPVs is subject to the InvIT holding a controlling interest (at least 51% of equity share capital) in the SPVs
What is dividend policy where investors may get rewards?
1) At least 90% of distributable cash flow of the SPV shall be distributed to the InvIT in proportion to its holding in the SPV.
2) At least 90% of distributable cash flow of the InvIT shall be distributed to the unit holders.
3) Dividend declared to be paid within 15 days; distributions to the unit holders to be made on a half yearly basis (however, management has intention to distribute dividends on quarterly basis as informed during road show. Such dividends will be totally tax free in the hands of the Unit holders)
Reasons to invest in IRB InvIT Fund IPO
- It is first company to get approval from SEBI under Infrastructure Investment Trust (InvIT) and has Unique Business model.
- Trust has good credit rating. CARE has rated as CARE AAA (Stable) IND RA as IND AAA Outlook Stable. This indicates credit worthness of Trust and not the units /shares that would be issued by the trust.
- Trust has acquired six projects that are already in operation and generating revenues at a CAGR of above 11 per cent.
- 90% of available cash flow would be distributed to unit holders by way of dividend which is tax free. This is unique business model, we need to see in future how this would work exactly.
Also Read: 7 Tax Saving Mutual Funds to invest in 2017
Reasons not to invest in a IRB InvIT Fund IPO
- There is no clarity about how one would get the invested amount back say after 15-20 years. These BOT projects are generally for around 16 years. Means company has to invest the money and after 16 years, these would be property of Govt. of India. These are somewhat like STP in mutual funds. You invest money and you take out money every Qtr or every year from your principal (+ any returns that may generate). But at the end of the tenure, you would not get any money. If such companies are investing in projects which are generating revenues at CAGR of 12% and after 16 years, such projects transferred to Govt. of India, the investment amount would be zero or it would reduce over a period of time and comes back to zero. If the understanding is true, these funds would provide very less returns from IRB InvIT Fund IPO.
- They have not executed definitive documentation with respect to the Formation Transactions, the debt financing arrangements, the ROFO/ROFR Deed and the Future Assets Agreement. company completion of the Formation Transactions, pursuant to which they will acquire the Project SPVs, and the transactions contemplated by the debt financing documentation are subject to certain closing and other conditions that may prevent us from acquiring the Project SPVs or providing debt financing to them.
- The debt financing proposed to be provided by the Trust to each of the Project SPVs comprises of certain unsecured, interest-free and interest-bearing loans as theyll as loans that, subject to certain approvals, may be secured by a subordinate charge on (i) the cash flows deposited in the escrow account and (ii) the escrow account of such Project SPV. The payment obligations of the respective Project SPVs in relation to such debt financing will be subordinated to all existing and future obligations of the Project SPVs towards any secured senior lenders.
- Any payment by the Project SPVs, including in an event of termination of the relevant concession agreement, is subject to a mandatory escrow arrangement which restricts their flexibility to utilise the available funds.
- The regulatory framework governing infrastructure investment trusts in India is untested and the interpretation and enforcement thereof involve uncertainties, which may have a material, adverse effect on the ability of certain categories of investors to invest in the Units, company business, financial condition and results of operations and company ability to make distributions to Unitholders.
- They must maintain certain investment ratios, which may present additional risks to us.
- The Sponsor currently holds 74% of the equity share capital of MITPL, and its ability to acquire the residual 26% of the equity share capital from the other shareholders of MITPL is subject to obtaining NHAI’s consent. In case of any delay or failure to obtain such consent, the Sponsor may be unable to acquire such equity shares in a timely manner or at all and the Trust may be unable to acquire 100% of the shareholding in MITPL from the Sponsor prior to listing of the Units or at all.
- The Valuation Report, and any underlying reports, are not opinions on the commercial merits of the Trust or the Project SPVs, nor are they opinions, expressed or implied, as to the future trading price of the Unitsor the financial condition of the Trust upon listing, and the valuation contained therein may not be indicative of the true value of the Project SPVs’ assets.
- The Project SPVs’ concessions are illiquid in nature, which may make it difficult for us to realise, sell or dispose of company shareholdings in the Project SPVs.
- The Project SPVs may be required to undertake certain development of the Initial Road Assets, which may present additional risks to us.
- Other risk factors (Internal and external) can be viewed in the draft prospectus.
IRB InvIT Fund IPO – Is it IPO or New Fund Offer?
Since this company is issuing units to its members and would pay back 90% of returns to investment holders and 10% would be retained for business growth, you would have got doubt whether this is mutual fund scheme issuing New Fund Offer or whether this is an IPO. If it is NFO, it should have sold the units at Rs 10 Per unit. However the units are sold at Rs 100 to Rs 102 per units. These are tradable on BSE and NSE Stock Exchanges. These are like ETFs which has NAV + tradable on stock exchanges.
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Recommendation / Investment strategy – IRB InvIT Fund IPO
Financials does not make any sense here as they are combined financials. It has unique business model. Trust has acquired six projects that are already in operation and generating revenues at a CAGR of above 11 per cent. However, minimum investment of Rs 10 Lakhs makes it unattractive. These funds would provide 8% to 12% returns before tax and they are not guaranteed. If the issue is oversubscribed it may get listing gains too. Many foreign investors / large financial institutions are waiting for this IPO. If you can invest Rs 10 Lakhs for long term, this would be definitely a best bet to ger higher returns. If you cannot invest such large money, post listing invest Rs 5 Lakhs. This is high risk investment option.
Disclaimer: I do not have an interest in investing in this IPO. The idea of giving positive and negative factors to investors in this article is to create awareness and education about this IPO. One should NOT constitute this as investment advice to buy. Please consult your investment advisor before you invest in such high risk investment options.
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IRB InvIT Fund IPO – Unique Investment Option – Should you invest
How do I actually subscribe to this IPO . I usually subscribe to ipo through ICICIDirect , but it’s not offering this IPO.
It would open on subscription opening date
Do you suggest to apply for this IPO by retail investors? If so, details please. Ymr
High risk investors can invest. Alternatively you can wait till we get complete clarity on such investment options which is unique and new
Many people are saying this is high risk. But the question is , is it risky as debt instrument or risky like any stock ? 10 lac is big amount, but for real estate like investment even small investor needs to put more money to buy his home with lots of uncertainties. I know soon REIT’s with smaller ticket size will also come up with IPO. But I expect returns from REIT might me lesser than InvIT.
After reading your blog about infrastructure investment, I have gained a lot of information that helps me to explore my knowledge about Investments. Thanking you Rashi
Not able to understand the full implications of this kind of business model.
By the way, in your STP example, how your principal becomes zero after a certain period-not able to understand. If you are referring to your ‘liquid fund’ from which you are making STP every week/month (whatever it is), then, you may be having zero balance in your liquid fund, but, commensurately you would have same / less/ more (depending upon market performance) amount/units in your destination mutual fund scheme account.
Hi Kamal, regd your point about how it would become zero, let me explain to you. Company would invest the money in BOT projects now. They would get BoT toll charges till 15-20 years. Most of the Toll would have approx 16 yrs life span, later the projects would be movd to govt. of India. In such scenaio company might not get any compensation because that is how the Toll model is built in. You would get regular collections till it is transferred to Govt.
Regarding INvit IPO,I cannot concur with your views.Even though it is not MF,many infrastructure Funds(Sector Specific) had given negative returns.They have got long gestation periods.Passing of the Bills of Infra Companies is beset with several problems like State Govts releasing funds,corruption by the executing officials and high handedness of Contractors who have got the backing of Politicians.Except for L&T Infra,I do not consider any other company worth investing.I advise the readers to stay off from the issue as distribution of dividends and pop are quite uncertain.
Thanks for your views Ramakrishna. Infra Funds are different from InvIT funds. InvIT funds are regulared as per new Infra Investment Fund Trust Regulations. First understand how InvIT funds work. You can check the pros and cons indicated in this article. Infra Funds invest in Infra companies + banking companies. IRB InvIt fund invests only in Toll projects. The objectives are different. Don’t compare them with Infra mutual funds. Yes I agree these are unique and high risk invesmtent option (which I indicated in the article). Since this is first company coming under InvIT regulations, we need to keep a close watch so that in future we can invest in good InvIT regulated companies for higher returns.