InvITs will be a platform for promoters to transfer revenue-generating assets from the holding company and cash out. Photo: Mint
With regulatory approvals in place, IRB Infrastructure Developers Ltd is all set to tap investor funds through the Infrastructure Investment Trust (InvIT) route. Analysts say not just IRB but others in the infra sector such as GMR Infrastructure Ltd, IL&FS Transportation Networks Ltd and engineering giant Larsen and Toubro Ltd (L&T) have also queued up.
Why this sudden rush? There are two good reasons: the need for infrastructure promoters to exit completed projects, which will help plough back money into new ones and the need to cut debt in the parent company. It is well-known that infra firms have been chained down by burgeoning debt for about five years with the legacy of some old projects stuck for various reasons like clearances or payment delays. IRB’s net debt as on September 2015 wasRs.12,565 crore. Similarly, that of Adani Power Ltd was Rs.48,477 crore and GMR Infrastructure was Rs.43,470 crore, while others are not far behind.
Now, InvITs will be a platform for promoters to transfer revenue-generating assets from the holding company and cash out. Cash flows from this asset transfer can help promoters to exit or dilute their stake in completed projects and use the funds for future projects. For instance, IL&FS Transportation Networks has around 13 completed road projects. Also, the parent firm can use the funds to pay off existing debt. Lower interest cost can improve net profit, too. Importantly, existing retail investors in the parent firm may gain from improving stock valuation, as the firm trims debt.
Meanwhile, investors can also participate in InvITs through units like in mutual funds, except that the ticket size of each unit would be significantly high. Of course, the risk is less than investing directly in infra firms as these would house only completed projects.
Yet, it is not that InvITs are risk-free. After all, the funds are deployed into large infrastructure assets. Revenue from this segment can fluctuate based on traffic and toll rates in the case of road projects, or a power tariff in the case of power projects. As Sandeep Singh, analyst at India Ratings Ltd, points out, dividends paid out to unit holders depend on operating efficiency of the business, costs, and also the expenses in the firm.
Although this model was mooted many months ago, the tax exemption allowed for dividends given to InvITs was announced in the budget this year. It also comes when the government has committed to spend close to Rs.97,000 crore for roads and railways this year.
InvITs are likely to renew investor interest in the infrastructure segment. The Nifty Infra index is already inching up, in the hope that the trend towards InvITs will make balance sheets of infra firms healthier. That said, it is still a long haul, mirrored in the infra index’s underperformance to the Nifty 50.
[“Source-Livemint”]
