Can InvITs help debt-ridden infra industry?

As many as five more infrastructure companies are moving ahead with issue of infrastructure investment trusts (InvITs) after IRB Infrastructure Developers’ InvIT got oversubscribed 8.5 times.

Market analysts project between ₹15,000 crore and ₹20,000 crore being raised through the InvITs this year helping release locked up funds of banks and the equity capital of the developers in infrastructure projects.

“InvIT is definitely one of the new and most sought after tools for infrastructure companies which are leveraged and have operating and cash generating assets. As all infrastructure companies have large debt exposure where the cost of borrowing is an important aspect, any move, be it InvIT, masala bonds, any kind of instrument that allows the cost of borrowing to be brought down considerably is going to help infrastructure grow faster and forward,” MEP Vice-Chairman & MD Jayant D Mhaiskar told BusinessLine . MEP Infrastructure Developers (MEPIDL)is aiming to raise ₹1,200-1,600 crore, although the assets to be put in the InvIT is still to be considered.

For Anil Ambani-led Reliance Infrastructure, InvIT could emerge as a tool to not only reduce its consolidated debt by ₹3,200-4,000 crore, but also focus more on EPC contracts. The company is planning to raise ₹2,500 crore through the InvIT.

The others in the fray include IL&FS Transportation Networks (ITNL, about ₹2,500 crore), GMR Infrastructure (about ₹4,000 crore), Anil Agarwal-controlled Sterlite Power Transmission (₹2,650 crore) and L&T. Harsh Shah, the CFO of Sterlite Power said, “The country needs huge amount of investments in transmission which offers great opportunities for the sponsors of InvITs to grow the portfolio. What InvIT allows us to do is we build a project, sell it to an InvIT, it gets us stable growing cash flows, the sponsor gets its equity, and then invests it back into new projects — hence, the cycle sustains.” However, fund-raising via InvITs may not be a game-changer for the infrastructure sector as this would meet only a fraction of the overall required investments . “The total liquidity locked in the infrastructure sector is ₹6-8 lakh crore and the bank funding is about ₹16 lakh crore. As the amount deployed in infrastructure is high, InvITs emerge as one of the tools to unlock capital for developers and also get the additional source of funding. I would not say it will be a game-changer for the infrastructure industry, but it will be an important tool,” according to K Ravichandran, Senior Vice-President, ICRA.

But there are risks too. Infrastructure project delays, and unstable cash flows are some of the major risks, especially in the road sector — and toll-roads particularly.

“In case of InvITs, you have revenue linked to market risk and some of these market risks are structural trends. So, while a country level traffic may grow, a particular corridor may have permanent loss of traffic. Given this and the fact that InvIT is an instrument that is giving you 9-12 per cent capped internal rate of return (IRR), there is a very low probability that your IRR can exceed that number, but there is a fair probability that the IRR can get much lower,” said Devam Modi, Director, Equirus Securities.

“The infrastructure sector requires a minimum fund-raising of ₹3-4 lakh crore to deleverage to a sustainable level,” Ratnam Raju Nakka, Associate Director — Infrastructure & Project Finance at India Ratings & Research said and added that only a few players such as IRB Infrastructure and MEPIDLwould benefit, as these companies have relatively lower debt.

Although most of the InvITs announced so far are in the road sector, experts see the potential for InvITs in the sectors having stable cash flows such as transmission sector, annuity projects (annuity is another form of Build-Operate-Transfer (BOT) projects, different from toll) and renewables.

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