IRB InvIT Fund, sponsored by engineering company IRB Infrastructure Developers, opened for subscription on Tuesday at a price band of Rs 100-102 per unit. The IPO, which is the first in the InvITs space, will close on May 5. The company expects to raise Rs 5,035 crore comprising fresh issue of units aggregating to Rs 4,300 crore and an offer-for-sale of nearly 3.48 crore units by IRB Infra Developers and its arms – Modern Road Makers, Aryan Toll Road, ATR Infra and Ideal Road Builders. IRB InvIT Trust is the Registered Infrastructure Investment Trust under the InvIT Regulations. The Trust primarily intends to own, operate and maintain a portfolio of six toll-road assets in the Indian states of Maharashtra, Gujarat, Rajasthan, Karnataka and Tamil Nadu.
In a research report, Angel Broking has recommended subscribe on the issue. Abhishek Lodhiya (Sr. Equity Research Analyst – Infrastructure, capital goods and real Estate, Angel Broking) said,” In terms of valuations, we have considered the conservative traffic growth (3-5%) and higher discounting factor of around 11% which results in the return of 25-30% on the enterprise value. Further, reduction in cost of debt and increase in traffic growth will lead to further higher returns. Hence, considering the above positives coupled with attractive valuations, we recommend a Subscribe on the issue.”
Below are the 5 observations from the brokerage house
Portfolio of income generating assets: Upon completion of the Formation Transactions, Trust will own 100% of six Project SPVs. Each of these Project SPVs owns, operates and maintains a toll-road project in India. The Initial Road Assets have growth potential due to expected growth in traffic volumes as a result of regional growth and expected increases in toll fees as a result of inflation adjustments.
Diversified road project portfolio and revenue base to provide an edge: The geographical diversification of the Initial Road Assets has improved due to experience and expertise, including Trusts ability to evaluate, acquire, operate and maintain new projects. The geography and temporally diverse project portfolio provides them with an advantage in capitalizing on new opportunities available in the roads and highways sector. That type of diversification strengthens their business by reducing their reliance on any specific region or project and reducing the potential impact on the business of any economic slowdown or force majeure event in any particular region or with respect to any particular project.
Experienced Sponsor and Project Manager: The Sponsor is one of the largest infrastructure development and construction companies in India in terms of net worth in the roads and highways sector with a large project portfolio of 8,183 Lane Kms of roads and highways in operation, under construction or under development, excluding the Initial Road Assets, as of December 31, 2016. The Sponsor has an experience in developing roads and highways infrastructure and has received various industry awards and recognitions. The Project Manager is a wholly-owned subsidiary of the Sponsor, having executed a majority of all EPC work being undertaken by the Sponsor. It also acts as the operations and maintenance contractor for substantially all of the Sponsor’s projects, including the Initial Road Assets.
Low leverage upon listing to provide debt capacity for financing future assets: The net proceeds will be used to repay and replace a significant portion of the Project SPVs existing indebtedness. The resulting low leverage will provide them with debt capacity to grow their business, including financing future acquisitions. Trust intends to finance future development and acquisitions through the issuance of additional Units, as well as through bank borrowings and other indebtedness, subject to the borrowing limits contained in the InvIT Regulations.
Efficient management team with industry experience: An Investment Manager who has managerial and operational experience in the roads and highways sector will be giving advice. Their projects will be managed by qualified personnel of the Project Manager. They believe that the experience and leadership of these teams will contribute to their growth and success and will position the Initial Road Assets to be operated and managed in an efficient manner.
Growth opportunities and access to Sponsor’s portfolio: With a great relation with the Sponsor, they will have an access to an important pipeline of potential acquisitions. Pursuant to the ROFO/ROFR Deed and the Future Assets Agreement, the Sponsor has agreed to provide them with rights of first offer and first refusal with respect to certain toll-road assets located in India, which will be owned or acquired or developed by the Sponsor or its existing or future subsidiaries. The valuation for the toll-road assets under the Future Assets Agreement will be based on the average of the valuations provided by two independent valuers, one appointed by the Sponsor or its subsidiary, and the other by the Trust (acting through the Trustee) and the Investment Manager.