InvITs suffer from a case of misplaced expectation
Infrastructure investment trusts (InvITs) have failed to create much excitement on the bourses so far. Shares of both listed Indian InvITs—IRB InvIT Fund and India Grid Trust, have underperformed the benchmark Sensex since their listing last year, with the former declining at a much faster rate.
IRB InvIT Fund is trading 17.4% below its issue price of Rs102, while India Grid Trust is 4% below its issue price of Rs100.
Sure, since InvITs are not classic equity instruments, it’s not appropriate to look merely at the share price performance. For InvIT investors, returns would also be in the form of dividends, interest and buybacks. In short, InvITs are hybrid investment products. That’s also one reason why the instrument may not have caught investors’ interest yet.
Analysts tracking these stocks say distribution per unit (DPU) is a parameter one should look at to gauge if these companies are delivering what they promised, over and above the share price returns.
At the time of announcing December quarter results, IRB InvIT Fund said its total payout i.e. DPU since listing stood at Rs7.55. “Annualised payout of 12% maintained as per the initial guidance,” it said. India Grid Trust’s DPU for 7MFY18 was Rs6.56. India Grid Trust maintains that it is on track to deliver its guided DPU of Rs9.2 for fiscal 2018.
According to analysts, though share price movement of both InvITs hasn’t been impressive so far, DPUs are on track. They add that India Grid Trust’s underlying business model is annuity-based, offering some amount of certainty on the revenue front. On the other hand, for IRB InvIT revenues depend on movement in toll traffic, which is comparatively difficult to predict. That probably explains why India Grid Trust shares have fared comparatively better.
Overall still, “InvITs suffer from a perception problem,” said an analyst, who did not want to be named.
According to Sumit Jalan, managing director and co-head of India investment banking and capital markets at Credit Suisse, “Within the regulatory framework, invITs are classified as equity, and therefore the pool of capital that they have attracted has been from equity funds. Naturally, the fund benchmarks are equity indices, which enjoy comparatively higher internal rates of return (IRRs).”
“However, invITs are actually closer to debt than to equity, and a mismatch occurs when a fund with a higher cost of capital invests into a debt-like instrument. In short, equity investors are looking to earn a higher return than what the debt-like invIT product can deliver, and therein lies the problem. If debt funds were investing into invITs, their post-listing performance would likely have been better,” he said.
Given this, what can change the outlook for these stocks?
“When expectations for IRRs come down and there is better understanding about these instruments being more of a hybrid and closer to a bond, with some premium offered for this, then things may start looking up for InvITs. IRR expectations would need to come down to 11-12% from their current 13-14% level,” Jalan added.
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