Investor interest in the trust will be key given that enterprise valuation of R80 bn is fairly aggressive.
India’s first Infrastructure Investment Trust (InvIT) will soon be a reality as IRB filed the DRHP (draft red herring prospectus) earlier this month for a fresh issue of R43 bn apart from offer-for-sale. Enterprise valuations of R80 bn implying 8.4x FY18 EV/Ebitda are higher than our estimates of R70 bn. DRHP valuations are based on traffic CAGR assumption of 6.5-7.0% (except Surat-Dahisar) and 5.5% inflation annually. We tweak our estimates and maintain Hold rating with revised TP of R250 (vs R240 earlier).
Six projects with 4-21 years of residual life: IRB expects to raise R43 bn by means of primary issuance apart from offer-for-sale by sponsor group companies. There is an option to retain 25% of oversubscription. Six projects will be part of trust: (i) Surat-Dahisar; (ii) Bharuch-Surat; (iii) Tumkur-Chitradurga; (iv) Omallur-Salem; (v) Talegaon-Amravati; (vi) Jaipur-Deoli, which have a residual life of 4-21 years and traffic history of 2-5 years.
Regulatory framework sorted: Regulatory clearances from now on should not be a hassle as IRB has 100% stake in all projects except Omallur-Salem. The product is investor-friendly as recent budgets have cleared the taxation issues.
Investor interest key as valuations high: As per the DRHP, EV of the trust would be R80 bn implying 8.4x FY18 EV/Ebitda. Taking into account all external bank debt, subordinate debt and sponsor-group debt, implied equity valuation is R30 bn. But this is based on aggressive traffic CAGR assumptions of 6.5%-7.1% over the life of the assets (except Surat-Dahisar) along with 5.5% inflation linked toll hike. Based on our estimates of 5% traffic CAGR and 5% inflation linked toll hike, we expect the EV to be R70 bn. Investor interest remains to be seen given management indication of 12% IRR.
Balance sheet improvement on the cards: Assuming an EV of R80 bn, this issue will unlock value of close to R10 bn for IRB. Immediately it may use all the proceeds from offer-for-sale (R10 bn), repayment of subordinate debt (R7 bn) and loans extended to SPVs (R8 bn) to reduce debt, bringing down the net debt: equity leverage to 2.2x by FY17 end.
Maintain Hold with revised SOTP based PT of R250 (vs R240 earlier).
Valuation remains key to the success of issue: IRB has provided detailed valuation by a third party of the 6 road assets with underlying methodology and assumptions. Independent traffic consultant reports have been used as the basis for traffic assumptions. We believe these valuations are fairly aggressive and based on our estimates equity valuation of R19 bn is more realistic.
Financial leverage to reduce to 2.2x by FY17-end: IRB has a fairly low financial leverage of 2.5x as of FY16 compared to peers being above 4x. However, with potential value unlocking to the tune of R10 bn (assuming EV of R80 bn and equity valuation of R30 bn), we believe the leverage will reduce further to 2.2x by FY17 end.
Aggressive assumptions on traffic growth; 56% of the valuations of the trust are from two projects i.e Tumkur-Chitrdadurga and Jaipur-Deoli; concentration of projects in western region where agitation against tolling in states like Maharashtra has happened in the past; ongoing CBI investigation against the promoter.