Event update: IRB Infrastructure Developers (Outperformer) - Management re-assures InvIT fundamentals remain intact

Event

IRB InvIT Fund (InvIT), wherein IRB is the sponsor with a 16% holding, had organised a call to update on the current state of the business and address investor concerns, if any.

Details

• IRB management has assured that there is no fundamental concern in the InvIT assets and the business continues as usual.
• Improvement in traffic was seen in Q3FY18 after being impacted by slowdown post GST implementation in Q2FY18. The company continues to maintain that the growth in traffic should sustain going forward. As a result, the management does not expect any adverse impact on its cash distribution and continue to meet its quarterly distribution guidance of Rs3/unit.
• IRB has also assured the investors that it will continue to offer projects under its portfolio to the InvIT once they stabilize. IRB is expected to offer 2-3 projects in couple of years to the InvIT. This would further boost the IRR of the InvIT. The management has highlighted that the acquisition of Amritsar Pathankot has led to the increase in IRR of the InvIT by 50-75bp.
• The management of IRB has also indicated that the O&M cost are fixed price contract with the sponsor. Hence, there is no variation expected in these contracts which could materially impact the profitability of the InvIT.
• The management indicated it was open to consider buyback of units instead of capital reduction as a means of distribution. However, this would be subject to regulatory clarifications and approval from the unit holders.
• The growth in traffic at Amritsar Pathankot project remained impacted in Q3FY18 due to environmental issues. However the traffic is back to normalcy and the growth in traffic is expected to be in line with the InvIT’s expectation for FY18.
• With superior credit rating of AAA, the InvIT is confident to add more assets to its portfolio through borrowings.
• In the last couple of months, IRB, the sponsor has increased its stake from 15% to 16% in the InvIT.

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Improving traffic growth in key assets like Bharuch-Surat and Surat-Dahisar in Q3FY18 is a key positive as these are large and mature assets. Most other assets meanwhile also continue to post buoyant traffic growth. We expect this traffic growth momentum to sustain going forward led by improving economic growth momentum and a low base (impacted by de-monetization/traffic diversions/GST implementation). Based on our cash flow estimate, IRB InvIT appears well on track to distribute Rs12/unit on annualized basis in FY18 and FY19. IRB InvIT offers a unique combination of operating assets with strong growth potential with an attractive IRR potential of 12-13%. It also offers scalability potential through addition of new assets using its leveraging capacity. Maintain Outperformer with a revised SOTP-based target price of Rs274.