Purchase price of a new road asset needs to be lower than its current rate of return for investors to get an upside
Even on adjusting for these dividends, investors are reeling under losses at its ruling price of ₹65.5
Backed by road assets, Infrastructure Investment Trusts (Invit) looked like the perfect investment vehicle for those seeking steady yields. Ever since their listing in May 2017, though, the IRB Invit Fund has not delivered returns to investors.
Since its listing at a price of ₹102, the Invit has paid about ₹22 in dividend in the past two years. Nevertheless, even after adjusting for these dividends, investors are seeing losses at its ruling price of ₹65.5.
When it was first launched, the estimated Internal Rate of Return (IRR), a measure to arrive at the return from all projects, was about 13-14%. That yield should have been decent enough to give returns.
Sadly, though, that has not been the case. Toll collections have disappointed on two key roads. A sand-mining ban closer to the Pathankot-Amritsar highway and to Jaipur-Deoli saw toll collections shrink.
“Traffic has stabilised at Pathankot-Amritsar (revenue up 4% yoy in Q4 FY19). However, traffic on Jaipur-Deoli was weak in Q4 FY19, reflected in a 4% yoy dip in revenue. We believe the mining ban has been factored into current traffic figures as it has been over a year since the ban was announced (Q3 FY18)," said brokerage firm CGS-CIMB Securities India Pvt. Ltd. in a note to its clients.
Besides, of its seven operational road projects, two are likely to soon slide off the Invit’s grid. This would decrease toll-cash flows to the Fund. After the concession period on road assets ends, the road assets return to the government.
The good part: the other five projects have longer residual lives. Thus, the benefits of toll collections could accrue for a long time. Any rise in traffic here would naturally increase returns to investors. Additionally, the IRB Invit Fund can increase its road assets. Ideally, the purchase price needs to be lower than its current rate of return for investors to get an upside.
A cause of concern is the commencement of the Dedicated Freight Corridor. Traffic volumes in some road projects may be be hit as trade traffic could move. IRB Invit Fund though does not have projects on this route, so the impact will be minimal.
For now, of course, analysts estimate the IRR of its remaining projects, factoring in the ruling price, at around 17%. That’s certainly better than its IRR during the initial offer.
Still, investors should keep an eye on toll collections. Given the slowdown in the automobile sector and sluggish movement in trade traffic, disappointment here could result in a bumpy ride. A consolation, though, is a reasonable dividend payout.