InvITs: Investing for an additional source of incomešŸ’°(IRB InvITšŸ›£)

We are always looking out for additional sources of income – some look for more side hustles, I look for financial assets that can generate a regular income. But while entrepreneurs can start with little or no money, financial assets require an initial lumpsum investment.

One such income generating avenue currently available in the Indian equity market are InvITs aka Infrastructure Investment Trusts. TheyĀ are a close cousin of REITs, with the difference being in the nature of the assets owned by the trust. While REITs invest in income generating real estate assets;Ā InvITs, as the name suggests hold income generating infrastructure assets – there are two currently listed in India – the IRB InvIT and Indigrid InvIT.

How do the InvITs generate income?

IRB InvIT hold road assets – 7 National Highways and the toll collected from these roads generate the income which is distributed to the unit holders. Indigrid InvIT holds transmission lines and the revenue from the same is distributed to the unit holders.

This is fantastic because, in the normal course an individual investor can participate in the booming infrastructure business only by owning the shares of the infrastructure companies or by buying the bonds issued by them. The InvIT is a product in-between a share and a bond. Like shares, they are listed on the stock exchanges and hence be bought and sold easily and like bonds, they have to mandatorily make income distributions to the unit holders.

IRB InvIT’s story so farĀ 

Ticker: IRBINVITĀ CMP is Rs. 52.60/- (NSE as on 4 Feb 2020)

As you go on road trips, good smooth roads are divine and for such roads you have to pay a toll and it is this toll collection that is distributed back to the unit holders of the IRB InvIT.

IRB InvIT is Indiaā€™s first listed Infrastructure Investment Trust and isĀ promoted by road developer IRB Infrastructure. The InvITĀ owns, operates and maintains a portfolio of 7 toll roads across Maharashtra, Gujarat, Rajasthan, Karnataka, Tamil Nadu and Punjab. The aggregate value is approximately ā‚¹7,500 crore.

Tumkur Chitradurga toll plaza enroute from Bangalore to Goa
Tumkur Chitradurga toll plaza enroute from Bangalore to Goa

Their IPO was in May 2017 and listed at Rs. 102/- on the stock exchanges. They aim at a yearly distribution of Rs. 12/- unit to the unit holders. The distribution is paid quarterly and is divided into three heads – Ā dividend, interest and capital. As per the new IT rules dividend and interest payouts are taxable in the hands of the investor while no tax is deducted on the capital amount paid out.

The minimum lot size is 2500 units and at CMP of Rs. 52.60/- the minimum amount required to invest is Rs. 1,31,500/-.

The income distributed so far by IRB InvIT

Screenshot 2020-02-04 at 16.04.15
The income paid to unit holders since listing of IRB InvIT

IRB InvIT made a distribution of Rs. 3/- unit for Q1 and Rs. 2.50/-unit for Q2 of of FY 2019 -20, taking the cumulative amount this year so far to Rs. 5.50/- per unit. The announcement for Q3 is awaited on 7 Feb 2020.

Since its listing at a Rs.Ā 102/-, the InvIT has paid over Rs.Ā 22/- Ā in distributions in the past two years, but even after adjusting for these dividends, investors who bought it during the IPO are seeing losses as the current CMP is Rs. 52.60/- (NSE as on 4 Feb 2020)

As per the rules governing the InvITs, 90% of the income generated has to be distributed to the unit holders, hence InvITs are good source of income, but the amount is not guaranteed as it is depended on the underlying business income generated.

Risks

  • The toll income can vary and are affected by government regulations and natural disasters. In the Q2 result announcements, they said the flooding of theĀ Tumkur Chitradurga tollĀ road during the floods in Karnataka resulted in subduedĀ trafficĀ andĀ resultingĀ low toll collections. Also the turmoil that arose when the government scrappedĀ ArticleĀ 370 whichĀ previouslyĀ gave specialĀ statusĀ to J&K resulted in traffic curbs along theĀ Pathankot Amritsar toll road.Ā 
  • From its current 7 operational road projects, 2 are likely to be soon returned to theĀ government and this will reduce the toll collected.

Merits

  • Any rise in traffic would naturally increase the toll collections and the return to investors.
  • IRB InvIT can buy new projects and increase its road assets.
Any rise in traffic would naturally increase the toll collections of IRB InvIT
Any rise in traffic would naturally increase the toll collections of IRB InvIT

However investors should keep an eye on toll collections. After a dismal Q2 this year, the company said the Q3 results will be better. The results are expected on 7 Feb 2020šŸ—“.

Also there are factors likeĀ slowdown in the automobile sector and sluggish movement in trade traffic all of which affect the toll income. But the company remains committed of Rs. 12/- per unit payout, so let’s seešŸ¤ž.

To quote from the book Buffettology ” The toll bridge is a classic form of the consumer monopoly. If you, the consumer, want to cross a river without swimming or using the boat, you very likely have to cross a bridge and to use the bridge you may have to pay the toll.” IRB InvIT presents the opportunity literallyšŸ˜€.

More on the Indigrid InvIT in another post.

Take care !!

 

2 Comments Add yours

  1. reitdude says:

    I had never heard of these. Seems like a uniquely Indian twist on REIT investing. The Dude approves!

    Like

    1. Miles and smiles says:

      šŸ˜€

      Like

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