Low valuations, weak market appetite, liquidity woes hurt new InvITs

New offers of infrastructure investment trusts (InvITs) this year may take a hit because of low valuations, weak market appetite, and liquidity issues, according to industry executives and experts. The model has been a preferred route for road and transmission assets, but lack of relevant traffic data for road InvITs may prove to be another dampener.

Rating agency ICRA had earlier in February estimated that Rs 2 trillion would likely be raised through the InvIT route over the next five years, including Rs 80,000 crore in the next one year itself.

“Valuations and market appetite will be a challenge for any InvIT and finding investors for large InvITs, such as that of the NHAI (National Highways Authority of India) will not be an easy task,” said Shubham Jain, senior vice-president, corporate ratings, ICRA. Business Standard last week reported the NHAI has filed its application for an InvIT with the markets regulator Securities and Exchange Board of India (Sebi).

InvIT as a model was introduced in 2016 to help infrastructure companies monetise assets and churn capital for new projects. So far, there are two InvITs which are publicly listed — IRB Infrastructure Developers’ IRB InvIT fund and Sterlite Power’s India Grid Trust.

Reliance Industries’ two fibre and tower InvITs and L&T Infrastructure Development Projects’ (IDPL) IndInfravit are some of those which are privately held.

“New public InvITs face issues over liquidity, which can be addressed by reducing minimum trading to single unit with three years of track record -- at parity with equity. It will improve liquidity further and improve, investors participation,” said Harsh Shah, chief executive for India Grid Trust (INDIGRID), an InvIT holding power transmission assets. 

Shah also stressed debt availability for InvITs needs to be addressed. “More institutions need to be allowed to lend to InvITS, including insurance companies and foreign portfolio investors (FPIs)."

The finance ministry in its 2019-20 Budget had allowed FPIs to lend to InvITs. However, company executives point out the Reserve Bank of India (RBI) guidelines on the same are still awaited.  For domestic insurance companies, an official from Insurance Regulatory and Development Authority of India (IRDA) said: “Insurance companies are allowed to make equity investments in InvITs, but not on the debt side.”

Domestic pension funds interest in InvIT, so far, has been lukewarm. “Typically Indian pension funds aren’t the first mover for large ticket (investment),” Shah from INDIGRID said, adding foreign pension funds, however, have both liquidity and appetite for such assets.

Pension funds, such as Canada Pension Plan Investment Board (CPPIB), private equity investors like KKR, and sovereign funds like GIC have been some of those which have invested in Indian InvITs in the past. 

New InvITs like the NHAI’s planned InvIT may also suffer over lack of relevant traffic data because of the Covid-19 crisis.

"They (the NHAI) will find it difficult to push InvIT this year. Covid-19 poses a challenge of lower traffic, which will finally reflect on the valuation. Either the NHAI will have to settle for lower valuations or wait for traffic to return to the pre-covid levels,” Jain from ICRA said.

According to some experts, those offering projects under the InvIT model will need to package and time them well. “Investors are looking for new opportunities and they will show interest but through stringent due diligence processes. Everyone is cautious in the current situation,” said Vishwas Udgirkar, partner and leader for government utilities and infrastructure development practice at Deloitte. He said due diligence for such projects will also be a concern. “How much will the NHAI be able to give realistic data is a concern and how will buyers correlate personal collection data with what the NHAI has stated. In the COVID hit traffic scenario, that is a challenge."