InvITS NOT A QUICK FIX FOR INFRA COMPANIES

With ~12,000 crore of InvIT issuances likely in 2017, debt woes may persist

The year 2017 could be a dream come true one for companies such as IRB Infrastructure, Reliance Infrastructure (R-Infra), IL&FS Transportation Network (ITNL) and Sterlite Power Transmission (demerged unlisted arm of Sterlite Technologies).

They are all likely to float an infrastrcture investment trust (InvIT). In such cases, the debt associated with projects transferred to the trust goes off the balance sheet of the parent company. For this reason, most of the listed entities in this segment have undergone a round of re-rating in valuations and could experience another when closer to listing of their InvITs.

But, the question is would this fully resolve their debt-related issues? Take R-Infra, planning to float ~3,000 crore of InvITs. With standalone debt of over ~15,000 crore as on end-September, an InvIT of the planned size could would reduce R-Infra’s liabilities by 20 per cent. In addition, analysts at Edelweiss state, diversification into the defence business, lack of clarity on Delhi power distribution regulatory assets and a depleting EPC (engineering, procurement, construction) order book remain investors’ key concerns.

IRB Infra, more focused on road construction and largely operating in the BOT (build, operate, transfer) segment would be marginally better off with InvITs. With long-term borrowing of over ~14,000 crore, raising an InvIT of ~4,000 crore could bring some relief. However there are concerns on BOT, given the government’s increasing preference for road projects awarded on the hybrid annuity model.

“Limited BOT opportunities is a near-term risk for IRB Infra (10 per cent share in past National Highways Authority of India ordering) to profitably grow its portfolio,” say analysts at Kotak Institutional Equities.

So, too, with ITNL, which had debt dues over ~27,000 crore as on end-March 2016. With revenues growing fast, it continues to face implementation constraints and this could cap its financial performance even if debt were to reduce by ~2,500 crore due to creation of InvITs. While effort is on to reduce debt, investors are unlikely to see medium-term improvement in the financials.

Another issue which sector experts mention on InvITs is that there are only a few investors which have seen successes with the floating of InvITs, even globally. With return ratios for infrastructure projects taking a knock in recent times, analysts also have doubts on how well these InvITs will be received by the investment community.

“Some of the assets clubbed into InvITs are those which didn’t attract buyers for a long time. The internal rate of return for these projects have fallen from upwards of 20 per cent to 15-16 per cent. We don’t know if pooling these under an investment trust can improve the appeal of these assets,” says a fund manager monitoring the infra space.

That said, these companies tend to be very interest rate-sensitive. In the past, even a one per cent drop in rates could push their net profit up by 10-15 per cent. While InvITs alone might not be the remedy, a sustained phase of lower interest rates and efforts to monetise non-core assets could offer some long-term cure to their debt woes.