What are Infrastructure Investment Trusts and how to invest in them?
India’s infrastructure growth story
To sustain growth, India is currently investing heavily in building its infrastructure projects like roads, railways, power plants and transmission lines, telecom towers, airports, etc.. What if you could benefit from India’s infrastructure growth story? Yes, you can do that through infrastructure investment trusts. In this article, we will understand what are infrastructure investment trusts and how to invest in them.
What is an infrastructure investment trust?
An infrastructure investment trust (InvIT) is a collective investment vehicle, just like a mutual fund scheme. It collects money from investors and invests it on their behalf in revenue-generating infrastructure projects such as roadways, airports, power transmission lines, telecom infrastructure, oil/gas pipelines, etc. The cash flows from these projects are shared with the investors.
An InvIT is a hybrid investment product that combines debt and equity features. It provides regular income in the form of distributable cash flows, just like a debt product. It also has the potential to provide capital gain, just like an equity product.
How does an InvIT work?
An InvIT has to register as a business trust with the Securities and Exchange Board of India (SEBI). It has a sponsor that transfers some of its infrastructure projects to the InvIT. Thus, an InvIT helps companies (sponsors) to monetise their assets. The InvIT can be listed on the stock exchange by offering its units to institutional and retail investors through an Initial Public Offering (IPO).
IRB InvIT Fund – India’s first listed InvIT
IRB InvIT Fund was the first InvIT to list on the Indian stock exchanges in May 2017. The sponsor, IRB Infrastructure Developers Limited, transferred a portfolio of six toll-road assets to the IRB InvIT Fund. These toll road projects are owned, operated, and maintained by the InvIT. IRB InvIT Fund raised Rs. 5,921 crores through its IPO. It got a good response, with the issue getting oversubscribed by 8.57 times.
The other listed InvITs in India include:
- India Grid Trust (INDIGRID) &
- PowerGrid Infrastructure Investment Trust (PGINVIT)
SEBI regulations for InvITs
InvITs have to adhere to SEBI guidelines, some of which include:
- At least 80% of the money must be invested in completed and revenue-generating projects. It addresses the execution risks that may be there in under-construction projects.
- At least 90% of the net distributable cash flows must be distributed to investors. The cash flows have to be distributed once every six months..
- Investors can participate in IPOs of InvITs with a minimum application amount of Rs. 10,000-15,000. Post-listing on the exchanges, the trading lot size is 1 unit. So, an investor can buy even a single unit. There is no lock-in period for the units.
How do investors benefit from InvITs?
An investor can get various benefits from investing in InvITs. Some of these include:
Low risk: InvITs hold infrastructure assets with long-term contracts usually spanning 15-20 years or even more. The portfolio comprises 80% or more completed projects. It shields the InvIT from project execution risks. Also, InvITs can leverage only up to SEBI specified limits. All these lower the risk for InvIT investors.
Regular cash flows: The InvIT portfolio comprises 80% or more completed projects that generate steady cash flows that are predictable. As per SEBI guidelines, InvITs have to distribute 90% of their distributable cash flows to investors once every six months. But, most InvITs distribute cash flows every quarter. It ensures investors get regular cash flows on their investments.
Potential for capital appreciation: An InvIT can increase its income by either adding new assets in its portfolio or increasing the service charges on its existing assets. For example, an InvIT holding toll-road projects in its portfolio can increase the toll charges every year as per inflation. It can also add new toll roads to its portfolio. Both these measures can increase the InvIT's income. An increase in the InvIT's income can enhance its net asset value (NAV). An increase in NAV can boost the price of the InvIT units traded on the stock exchange, providing capital appreciation to the unitholders.
- Liquidity: InvIT units listed on the stock exchange don’t have any lock-in period. Thus, the listed units can be sold at any time, providing liquidity to investors.
Performance of listed InvITs
Let us understand the financial performance of listed InvITs with the example of IndiGrid. IndiGrid InvIT Fund came out with its IPO in May 2017, wherein it raised Rs. 2,250 crores. At the time of IPO, the InvIT had a portfolio of two power transmission projects with a total network of eight power transmission lines of 1,936 ckms and two substations having 6,000 MVA of transformation capacity across four states (Source: Chittorgarh.com). The IPO was priced at Rs. 100/unit.
Growth from IPO till date: As of the quarter ended September 2021, the company has:
- 52 revenue-generating assets that span across 18 States and 1 Union Territory (4 states at the time of IPO),
- 40 power transmission lines of 7,570 ckms (8 transmission lines of 1,936 ckms at the time of IPO)
- 11 substations having 13,550 MVA of transformation capacity (2 substations having 6,000 MVA of transformation capacity at the time of IPO)
- Cash flows distribution per unit (DPU): Since the time of IPO (May 2017) till date (September 2021), the InvIT has distributed Rs. 52.15 as distribution per unit (DPU) in the form of dividend/interest/capital repayment. So, in a little over four years of listing, the InvIT has paid more than 50% of the money invested at the time of IPO (issue price was Rs. 100) in the form of regular cash flows to its investors. At the start of FY 2021-22, the InvIT guided a DPU of Rs. 12.75 and is on track to meet its guidance.
The price of IndiGrid units traded on the stock exchange is Rs. 144 as of 9th December 2021. So, it has given an overall appreciation of 44% since its listing.
The above chart shows IndiGrid has given an 89% total return and 16% CAGR return since its IPO listing in 2016. It includes the DPU as well as the capital appreciation. The return is better than the broad NSE 500 Index and some other indices.
Asset allocation with Glide Invest App
While InvITs are a good financial product to invest in, you need to follow asset allocation to diversify your investment portfolio as per your risk profile. Appropriate asset allocation includes investing in various asset classes like equity, debt, gold, real estate, etc. To understand your risk profile and to get recommendations for the appropriate investment products, you can partner with the Glide Invest App. You will get advice on how to plan and systematically invest towards your financial goals.
With Glide Invest, you will get guidance for:
- A personalised risk profile assessment
- Identifying your financial goals
- Appropriate asset allocation
- Making a financial plan for each goal
- Automating the financial plan
- Review and analysis of your financial plan
- Hand holding you till your financial goals are achieved