Bharat Highways InvIT IPO opens today: 10 key risks to know from DRHP before investing

Infrastructure investment trust (InvIT) Bharat Highways Infrastructure's ₹2,500 crore initial public offering (IPO) opened for subscription on February 28. The infra investment company's IPO, which will close on March 1, has a price band of ₹98 to ₹100 per share for the issue.

The IPO is entirely a fresh issue of 25 crore shares. Investors can bid for a minimum of 150 shares and in multiples thereof. The minimum amount of investment required by retail investors is ₹15,000.

The net proceeds are proposed to be utilised towards providing loans to the project SPVs, for repayment/ pre-payment, in part or in full, of their respective outstanding loans (including any accrued interest and prepayment penalty) and for general purposes.

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The allotment for the Bharat Highways InvIT is expected to be finalised on Monday, March 4, 2024, and it is likely to be listed on BSE and NSE on March 6.

Bharat Highways InvIT is an infrastructure investment trust established to acquire, manage, and invest in a portfolio of infrastructure assets in India, and to carry on the activities of an infrastructure investment trust as permitted under the SEBI InvIT Regulations. The InvIT’s initial portfolio consists of seven road assets, all operating on a HAM basis, in the states of Punjab, Gujarat, Andhra Pradesh, Maharashtra, and Uttar Pradesh, consisting of approximately 497.292 km of constructed and operational roads, as per the company's RHP report.

Let's take a look at the 10 key risks, as per the DRHP, you should know before investing in it.

1) The InvIT lacks an established operating history, posing challenges in assessing future growth prospects. Registered with SEBI, it intends to acquire 100 percent equity shares in each Project SPV from GRIL. With no historical financial data, evaluating past performance is problematic, making it challenging for investors to gauge future performance. Various factors, such as fundraising difficulties, changes in taxation regulations, operational performance, and asset acquisition, can impact growth prospects. Failure to address these challenges may disrupt operations and adversely affect long-term business prospects. There's uncertainty regarding the ability of InvIT Assets to generate sufficient revenue for cash distributions to Unitholders.

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2) The company's revenue from InvIT Assets relies entirely on consistent annuity payments from NHAI under hybrid annuity agreements. Any reduction or non-receipt of this annuity income could negatively impact our distributions. Projections indicate revenue from operations for Fiscals 2024, 2025, and 2026 from the seven InvIT Assets, totaling ₹678.3 crore, ₹620.2 crore, and ₹584.6 crore, respectively. However, it's important to note that these projections may not accurately reflect future financial conditions or operational results. Any adverse effects on revenue from InvIT Assets would consequently impact the business, cash flows, and revenue from operations of the InvIT.

3) Premature termination of any InvIT Assets could lead to non-payment, significantly impacting our financial health. NHAI holds the authority to terminate these agreements, posing a risk to the business, operational results, cash flows, and financial stability. Additionally, any delay or fault-related premature termination could damage our reputation and potentially lead to blacklisting or debarring from similar projects.

4) The company might face escalating costs, including O&M expenses, which cannot be offset by increasing annuity income under our Concession Agreements. These agreements have fixed terms and conditions throughout the concession period, with no room for negotiation. They typically mandate specific O&M standards and require it to adhere to maintenance protocols, incurring regular O&M costs. Additionally, operational disruptions or technology failures could adversely impact operations. Any significant rise in O&M costs beyond budget, coupled with failure to meet quality standards, may reduce profits and expose it to regulatory penalties, adversely affecting business, financial condition, cash flows, and operational results.

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5) The company's operational effectiveness relies on third parties for certain activities related to InvIT Assets' operation and maintenance. Any delays, defaults, or subpar performance by these third parties could significantly and adversely impact operations.

6) The firm may encounter challenges in renewing or maintaining the necessary statutory and regulatory permits and approvals required for operating InvIT Assets, potentially impacting business, operational results, and financial health. Project SPVs must acquire and sustain various permits, approvals, licenses, registrations, and permissions from regulatory and governmental authorities. These encompass consents from state pollution control boards, approvals under labor laws, permissions for groundwater extraction, and licenses for using explosives during construction activities for both existing and potential future projects acquired by the InvIT.

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7) Actual results may substantially differ from the projections outlined in the Offer Document due to inherent uncertainties and significant risks. The forward-looking statements, including revenue, profit, and cash flow projections for Fiscals 2024, 2025, and 2026, are subject to various factors, including business, economic, financial, regulatory, and competitive risks and uncertainties. The projections are based on best-estimate assumptions regarding future events and hypothetical scenarios, which may or may not materialise as expected.

8) Changes in governmental policies or relationships between the InvIT, Project SPVs, and government entities could negatively impact business, financial performance, cash flows, and operational results. Revenue for Project SPVs primarily comes from Concession Agreements with NHAI, necessitating positive relationships with NHAI, the Government of India, and state governments. 

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9) The InvIT, registered under the Indian Registration Act, 1908, may be dissolved under specific circumstances: (i) if deemed impractical to continue by the Trustee and Investment Manager, (ii) upon written recommendation and consent of Unitholders, (iii) upon delisting of Units, (iv) if directed by SEBI or due to illegality of activities. In case of dissolution, Unitholders may not recover their entire investment, depending on asset disposal terms. Default under financing agreements may trigger asset divestment or liquidation to repay lenders, but there's no assurance of full recovery. If default persists and lenders initiate proceedings, dissolution occurs immediately. Upon dissolution, Unitholders receive net assets after settling debts and liabilities, with no guarantee of full investment recovery.

10) Prior to the issue, there's no market for the Units, and listing them on the stock exchange may not create an active or liquid market. Listing doesn't ensure market development or sustainability, nor does it guarantee liquidity. Unit prices may be volatile, potentially making it challenging for investors to sell at or above the issue price. While the Units are intended to remain listed, continued listing isn't guaranteed, and meeting listing requirements may be uncertain. Assessing the InvIT's performance against domestic benchmarks may be difficult.