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Know your risk before the InvITs leap

InvITs, or infrastructure investment trusts, have been have been around since 2017, but not many may be familiar with this investment route. InvITs raise funds by issuing units to investors and then invest that amount primarily in infrastructure assets. InvITs can own and operate operational infrastructure assets such as highways, roads, pipelines, warehouses, power plants, etc.

In India, there are 18 Sebi-registered InvITs. Of these, only three InvITs are public and listed on the stock exchange: IndiGrid InvIT and PowerGrid InvIT invest in power transmission assets, while IRB InvIT invests in a portfolio of road assets to collect tolls throughout the concession period.

The yield from InvITs

Just like Reits, InvITs are also mandated by Sebi to distribute 90% of net distributable cash flows earned to the unitholders. Checking the current distribution yield gives a fair picture of the returns one can expect from their investments in InvIT. It is calculated by dividing the distributed income per annum by the current market price. An investor can continue to earn the yield at the time of investment if the cash flows for the company and distributions are sustained in the future years.

Are cash flows from power transmission companies stable?

Meghana Pandit, chief investment officer of IndiGrid, said the cash flows for power transmission InvITs in India are relatively stable as the revenue for these InvITs is dependent on the availability of transmission lines and not based on its utilization.

As to whether the default of payment by debt-ridden discoms impacts cash flows of the company, Pandit said that in inter-state transmission assets, the collection risk is comparatively minimal as the payments are made through a POC (point of contact) mechanism, which means, the central unit that collects money from discoms and pays the power transmitters, distributes the default across all the transmitters.

What about other InvITs?

The cash flows for the InvITs with road projects as underlying assets is dependent on various factors such as traffic load and availability of other roads for the same route, said Sahil Kapoor, senior executive vice president at IIFL Wealth. For example, cash flows of IRB InvIT were impacted in the last few years due to the pandemic and this reflected in the distribution per unit that fell from ₹12.25 per unit in FY19 to ₹8.5 in FY21 and ₹9 in FY22.

IRB InvIT was also hammered by a fall in the share price to ₹56 now from its listing price of ₹103.25 in 2017. Thus, the compounded annual return from the InvIT since its listing in 2017 has been only 0.7% despite the regular distribution of income to the unitholders. Thus, it is important to be mindful of the entry point.

What is the risk of capital loss?

Let’s say an InvIT consists of a single power transmission line. It raises equity capital of ₹100 on 1 January 2014 and generates cash flows of ₹20 per year from 1 January 2015, for a period of 10 years (until 2024). The internal rate of return or IRR for this InVIT works out to 15%. In that year, the power line becomes defunct due to wear and tear, and the InVIT’s contract for transmission is not renewed. Hence the value of the power line becomes zero. Thus, investors need to make sure that the investment manager of the InvIT is adding new assets to its portfolio (check distribution growth).

Should you invest?

Investments in InvITs can help diversify your portfolio further. But take note of the risks and rewards. Unlike Reits, there is no capital appreciation on the existing assets owned by InvITs and there is a risk of fall in net asset value of the company.

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