Bond-Like Securities Lure Top Indian Fund to Road Builders

  • InvIT yields not attractive enough for equity funds: SBI Funds
  • India’s first infrastructure trust from IRB falls on listing

As India’s first bond-like securities giving investors infrastructure exposure begin trading, the sector’s top equity fund manager said he sees benefits in picking up shares of the issuers rather than the new instruments.  

The hybrid instruments, known as infrastructure investment trusts, are likely to help developers reduce debt and release funds for new projects. The nascent stage of the InvIT market and the return horizon means it may not be attractive for investors with short time frames to invest in InvITs, said Rajendra Kumar Mishra, whose IDFC Infrastructure Fund returned 58 percent in the past year to become the country’s top-performing fund focused on construction, road builders, transportation and utilities.

“A growth investor with lower horizon might still want to choose between the parent vis-a-vis investment trust,” said Mishra. Firms that raise funds via InvITs should generate higher returns, and hence valuations, as they can now monetize assets without letting go of management control, he said.

To read about how InvITs may unlock $9 billion in spending, click here

A core part of Mishra’s investment is in construction and engineering services companies expected to benefit from the rising capital spending on roads, railways, metros, power transmission and distribution, he said. Much of this is being driven by the government, which in February pledged a record 3.96 trillion rupees ($62 billion) to build and modernize the nation’s strained infrastructure.

An index of five companies expected to list InvITs, including Reliance Infrastructure Ltd. and GMR Infrastructure Ltd., has gained 27 percent since early December, when the regulator eased rules for the instruments. InvIT yields will range from 9.5 percent to 11 percent, according to estimates by India Ratings & Research Pvt. in February.

Mumbai-based IRB Infrastructure’s initial public offering of the securities -- the first of their kind -- remained near the offer price of 102 rupees per unit on listing Thursday. 

InvITs are more suited for long-term investors seeking strong and consistent returns though the yields offered aren’t attractive enough for equity funds, said Dinesh Balachandran, a fund manager at SBI Funds Management Pvt.

The “illiquidity risk” of the instruments also needs to be monitored, Mishra said. “A sharp economic upswing -- say like 2004-2008 -- would dramatically improve cash flows and the distributable surplus in a short period. It could make a good investment then.”

Sterlite Power Grid Ventures Ltd., Reliance Infrastructure Ltd. and IL&FS Transportation Networks Ltd.’s are expected to come to market this year and, along with IRB, may use the proceeds to reduce overall debt by about 130 billion rupees, according to India Ratings & Research Pvt. GMR Infrastructure and MEP Infrastructure Developers Ltd. are also considering raising funds via the instruments.

“Infrastructure stocks have been laggards for long,” said Balachandran, who manages 56 billion rupees at SBI Magnum Tax Gain. “We are beginning to see value in some stocks with the turn of the investment cycle.”

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