What IRB Infrastructure’s InvIT IPO Offers Investors
InvIT will offer 12.4% internal rate of return to its unit holders: Phillip Capital.
IRB Infrastructure Developers Ltd. will on Wednesday launch the country’s first initial public offering (IPO) for an infrastructure investment trust (InvIT) to raise up to Rs 5,040 crore.
InvITs are allowed to raise funds from investors and direct them towards infrastructure projects or through a special purpose vehicle (SPV).
IIFL Holdings Ltd., IDFC Bank Ltd., Credit Suisse Securities (India) Pvt. and ICICI Securities Ltd. are the lead book running managers for the offer, which closes on Friday. The InvIT will be listed on the National Stock Exchange Ltd. and BSE Ltd.
Here’s all you need to know about the offer.
How IRB Will Use Proceeds
The company will use nearly two-thirds, or up to Rs 3,350 crore, of funds raised to repay external debt. The rest will go to the parent and sponsor IRB Infrastructure, which will hold a 15 percent stake in the InvIT post the issue for at least three years.
Projects In The Pool
The investment trust will hold six operational toll highways across five states: Maharashtra, Gujarat, Rajasthan, Karnataka and Tamil Nadu, all housed under the InvIT. The projects, operated through six SPVs, had a combined revenue of Rs 1,251.7 crore in the year ended March 2016, according to the company’s IPO prospectus.
What’s In It For Shareholders
The InvIT will offer 12.4 percent internal rate of return to its unit holders, according to brokerage Phillip Capital. This factors in 5.5 percent traffic growth and 4.5 percent inflation as measured by the Wholesale Price Index.
It also takes into account what investors will earn from buybacks and the returns the InvIT will earn from investments in non-convertible debentures. The trust will share 90 percent of distributable cash flows with its unit holders quarterly.
Key Highlights
- IRB Infrastructure to raise Rs 4,930-5,035 crore via InvIT fund.
- The units will be offered in the range of Rs 100-102 apiece.
- The offer will comprise a fresh issue worth Rs 4,300 crore and an offer for sale of 34.6 crore units at the upper end of the price band, with a greenshoe option that allows the InvIT to retain over-subscription of 25 percent of the issue size.
- Of the total units on offer, three-fourths are reserved for institutional investors and the rest for non-institutional investors.
- Bids can be made for a minimum of 10,000 units and in multiples of 5,000 thereafter.
What Are The Risks
Any decline in tariff on account of factors like fuel price rise, a hike in toll fee and a drop in frequency of travellers may affect business prospects, financials and results of operations.
Changes in tax benefits for InvITs is also one of the key risks given that some of the road assets under the instrument enjoy incentives under Section 80-IA of the Income Tax Act that allows deductions for investments in infrastructure projects.
Inflation could also push up operational and maintenance costs, which would affect the financials.
Valuations
IRB Infrastructure sought an enterprise valuation of Rs 7,900 crore in its prospectus, but lowered it to Rs 5,924 crore for listing, a 16 percent discount to the independent valuation.
At current valuations, InvIT is ‘selling’ its projects at a cost of 12.4 percent (implied IRR) and at no premium to its book value, which may not appear to be an attractive bargain for investors, said Phillip Capital in its note.
But InvIT listing will fetch the company Rs 1,700 crore upfront cash and will allow it to repay Rs 3,300 crore of debt, the report said. This will lower its net debt by Rs 5,000 crore and bring down its debt to equity ratio to 1.8 times from 3 times.
The company’s consolidated debt will also fall nearly 16 percent to Rs 12,600 crore from its March 2016 level.