Know your risk before the jump InvITs

InvITs, or infrastructure investment trusts, have been around since 2017, but few 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 may own and operate operational infrastructure such as highways, roads, pipelines, warehouses, power plants, etc.

In India, there are 18 InvITs registered with Sebi. 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 for the entire duration of the concession.

The yield of the InvITs

Like REITs, InvITs are also mandated by Sebi to distribute 90% of the net distributable cash flow earned to 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 income distributed per year by the current market price. An investor can continue to earn the yield at the time of investment if the company’s cash flows and distributions are sustained in future years.

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Are the cash flows of electricity transmission companies stable?

Meghana Pandit, Chief Investment Officer of IndiGrid, said that the cash flow from power transmission InvITs in India is relatively stable, as the revenue from such InvITs depends on the availability of transmission lines and not on their use.

As to whether non-payment by indebted discoms impacts company cash flow, Pandit said that in interstate transmission assets, the risk of collection is relatively minimal because payments are made through a POC (point of contact) mechanism, which means that the central unit which collects the money from the discotheques and pays the power transmitters, distributes the default to all the transmitters.

What about other InvITs?

The cash flows of InvITs with road projects as underlying assets depend 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, IRB InvIT’s cash flow has been impacted in recent years due to the pandemic and this has been reflected in the distribution per unit which has gone from 12.25 per unit in FY19 at 8.5 in FY21 and 9 in FY22.

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

What is the risk of capital loss?

Let’s say an InvIT consists of a single power transmission line. It raises equity from 100 as of January 1, 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 of this InVIT amounts to 15%. That year, the power line became obsolete due to wear and the InVIT transmission contract was not renewed. Therefore, the value of the power line becomes zero. Thus, investors should ensure that the InvIT investment manager adds new assets to its portfolio (check distribution growth).

Should you invest?

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

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