Why and when InvITs can be a good investment option

Think of the infrastructure and the proven investment option available in this space has largely been NHAI bonds. Direct exposure to the stocks of infra companies has its pitfalls. InvIT or Infrastructure Investment Trust sits somewhere between a bond and a stock. The underlying assets of InvIT are road and power transmission projects and it is a SEBI-regulated product, which in some cases is listed and operates like a mutual fund. InvITs are special vehicles that help the infrastructure company monetize the asset. Here are the key things to know about them.

How do they work

InvITs are a hybrid between debt and equity; they have stable and predictable cash flows like debt and they provide the ability to change the unit price, which is a feature like equity. With 80% of completed assets transferred from the asset owner to the fund, this significantly eliminates project risk and starts generating cash flow from day one.

InvITs also have predictable cash flow because the underlying assets typically provide long-term cash flow, typically for 15-20 years. The risk involved lies in the quality of cash flow, which generally depends on the type of projects, the route, the traffic they receive, capacity utilization and pricing.

The InvIT play on the volume. For revenue streams to increase, more projects need to be added to the InvIT. The financial health, governance and quality of InvIT’s parent company will play a role in the investment call.

InvITs must announce 90% of net excess cash flow as a distribution and this must be distributed at least semi-annually. The distribution of InvITs essentially has three components: interest (received from the underlying projects), dividends (return on equity invested in the projects) and income accrued at the level of the trust which is neither investment income. interest or dividends.

InvIT vs. REITs

REITs (Real Estate Investment Trust) can be called as a sister instrument of InvIT. Both are quite similar in principle, although REITs work on commercial real estate such as offices, shopping malls, industrial parks, warehouses, hotels, and healthcare centers.

Like InvITs, REITs must also ensure that 80% of the underlying assets are generating income and have relatively stable cash flows. InvITs can be publicly traded or can be publicly traded, while REITs must be publicly traded.

Returns InvITs listed

The India Grid Trust has given a return of 45% since its inception, Power Grid Infrastructure Investment Unit has given a return of around 28% since its inception while IRB InvIT Fund has given a negative return of 37% since its inception.

Most of the underlying assets of the IRB InvIT Fund have been loss-making and the distributable surplus is mainly made up of interest income, which could explain why it gave negative returns.

Taxation

The interest component of the distribution per unit (DPU) is taxed at the slab rate, while the dividend component is exempt if the SPVs of the underlying project have not opted for the concessional tax regime.

InvIT/REIT are subject to a 10% withholding tax.

For India Grid Trust, interest income is a significant part of distributions and had opted for concessional tax for all but one of its SPVs and hence dividend income is also not exempt in the hands of the trust. ‘investor.

In the case of Power Grid, four of its five underlying projects have opted for a preferential tax regime and therefore there will be a taxable dividend and an exempt dividend for the investor. For FY22, DPU by Power Grid ₹2.5 is a taxable dividend and ₹1.08 is an exempt dividend. Although in terms of exemptions, the InvIT power grid looks good now, but the scenario might change once more projects are added.

who should go

InvITs are best suited to High Net Worth Individuals (HNI). Even though the minimum investment amount has been reduced from ₹1 lakh to ₹10,000 to ₹15,000. However, InvITs are still in their infancy and regulations are still evolving. Like AMC shares, InvIT shares can also be sensitive to regulatory changes. Understanding the infrastructure sector and underlying projects to assess visibility and revenue growth (including capital growth) is essential, making the product best positioned for niche investors.

Published on

June 18, 2022

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