IRB InvIT Fund — Q1 FY25 earnings call

Call held 29 Jul 2024

Management summary

IRB InvIT Fund reported a stable quarter with a 3% growth in toll revenue, which was subdued due to the general elections. The company declared a distribution of Rs. 2 per unit. While EBITDA remained flat, PAT saw a decline due to increased financing and depreciation costs. Management highlighted the low leverage, ongoing refinancing efforts, and a clear pipeline of potential HAM assets from the sponsor group to address the InvIT's declining asset life, signaling a strategic focus on becoming a perpetual vehicle.

Highlights

  • Distribution of Rs. 2 per unit declared for Q1 FY25.

  • Consolidated toll revenue grew 3% YoY to Rs. 236 crores, impacted by traffic softening due to general elections.

  • Consolidated income stood at Rs. 275 crores, a modest increase from Rs. 269 crores YoY.

  • EBITDA was flat at Rs. 228 crores compared to Rs. 227 crores in Q1 FY24.

  • Profit After Tax (PAT) declined to Rs. 86 crores from Rs. 101 crores YoY, primarily due to higher interest and depreciation costs.

  • An effective tariff rate revision of ~2.5% was implemented from June 3, 2024, across four key projects.

  • Cumulative distribution since IPO reached Rs. 3,968 crores (Rs. 68.35 per unit), representing 67% of the aggregate funds raised.

  • Net debt to asset value remains low at 0.3:1, providing significant capacity for new asset acquisitions.

Concerns

  • Reducing weighted average life of assets

Key financials

  1. Consolidated Income ₹275 Cr +2.2%YoY
  2. Consolidated Toll Revenue ₹236 Cr +3.1%YoY
  3. EBITDA ₹228 Cr +0.44%YoY
  4. PAT ₹86 Cr -14.8%YoY
  5. Interest Costs ₹76 Cr +11.8%YoY
  6. Distribution Per Unit ₹2

What they filed

Q1 FY27: revenue up 69.1%, net profit down 21.0% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue270 275 282 291 277 +3%450 +64%528 +87%492 +69%
EBITDA224 224 232 245 232 +4%372 +66%388 +67%396 +62%
Net profit85 91 94 100 83 −2%60 −34%97 +3%79 −21%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Guidance & targets

Other

  • Availability of Pathankot-Mandi HAM asset for offer Other · FY25 · High confidence Completion in FY25
    On the acquisition front, HAM assets from the Sponsor Group i.e. VM7, Pathankot Mandi are expected to be completed in FY25.

    — Management

  • Availability of Chittoor-Thachur HAM asset for offer Other · FY26 · High confidence Completion in FY26
    Chittoor-Thachur is expected to be completed in FY26. Once completed, the said assets shall be available for offer to the Trust.

    — Management

Dividend

  • Payout per unit Dividend · next 2 to 3 years · Medium confidence Similar level with a potential 50 paisa increase
    If you look at for next 2 to 3 years, I think the payout will be on a similar level. At the current price, it translates around 12% to 14%. We expect a similar kind of payout based on the current dynamics, maybe 50 paisa increase in the payout.

    — Management

Risks & concerns

  • Reducing weighted average life of assets

    high

    With a weighted average life of less than 15 years and one asset's concession ending in FY27, there is a structural need to acquire new assets to ensure the InvIT's perpetuity.

    Analyst acknowledged

  • Softening of traffic growth

    medium

    Management cited general elections as the cause for slower traffic growth in Q1. While temporary, it highlights sensitivity to macroeconomic and political events.

    Management acknowledged

  • Negative cash flow impact from new acquisitions

    medium

    Management noted that acquiring a new project, especially if debt-funded, could initially 'eat some cash flow of the existing project' before improving overall long-term payout and InvIT life.

    Management acknowledged

  • Delayed compensation for deferred toll hike

    low

    The toll hike was delayed by two months (April/May). Management confirmed a representation has been made to NHAI for compensation, but the outcome is uncertain.

    Analyst acknowledged

Q&A highlights

3 direct
Concession Period Extension & Maintenance Costs Direct
Typically the major maintenance is incurred after every 5 years or 6 years. So, during this extended period of 5 years because the original concession was around 24-25 years, maximum extension is only for 5 years. So, based on our assessment in the last 5 years there will not be any major maintenance and the project will be handed over before the major maintenance requirement will come.

This clarifies a key valuation assumption, explaining why no major maintenance costs are factored in during the extended concession period for certain assets.

Asked by Dhiraj Dave

Asset Acquisition Strategy and Timing Direct
I think typically acquiring the toll road asset when your interest rate is on peak, that will be more appropriate time because if interest rate comes down, then automatically, seller will factor that kind of interest rate. So, then buying that asset when interest rate is at peak, that will make more sense than the buying at the bottom of the interest rate cycle.

This provides a counter-intuitive but crucial insight into management's M&A philosophy, suggesting they see the current high-rate environment as an opportune time to acquire assets before sellers re-price them upwards.

Asked by Tanveer Sure

Impact of Satellite-Based Tolling Direct
I think that will not have any significant impact neither on the cost side, nor on the revenue side... 80%-90% of the traffic is through traffic and whether you collect a toll on the particular toll plaza or through satellite, the number of vehicles will not change. And secondly whatever the short distance vehicles are there, today we might be losing some of the vehicles if they are not crossing the toll plaza. So, those will also come under the purview of the tolling if new system is implemented.

This addresses a major technological risk, with management confidently stating a neutral-to-positive revenue impact, assuaging investor concerns about disruption from the new system.

Asked by Dhiraj Dave

2 min read 6 chapters

Detailed narrative

Q1 FY25 Financial Performance

For the quarter ended June 30, 2024, IRB InvIT reported a consolidated income of Rs. 275 crores, up from Rs. 269 crores YoY. Consolidated toll revenues saw a 3% growth to Rs. 236 crores, with management attributing the modest growth to a 'softening of traffic' due to the general elections. EBITDA remained stable at Rs. 228 crores. However, PAT declined to Rs. 86 crores from Rs. 101 crores in the prior year, impacted by higher interest costs (Rs. 76 crores vs Rs. 68 crores) and depreciation (Rs. 63 crores vs Rs. 57 crores).

Distribution and Capital Structure

The Trust declared a distribution of Rs. 2 per unit for the quarter. This comprises Rs. 1.35 as interest, Rs. 0.29 as dividend, and Rs. 0.36 as return of capital. Since its IPO in 2017, the InvIT has distributed a cumulative amount of Rs. 3,968 crores, or Rs. 68.35 per unit, which is 67% of the initial funds raised. The net debt to asset value stands at a conservative 0.3:1, which management highlighted provides 'sufficient debt capacity for acquiring new assets'.

Asset Acquisition and Growth Strategy

With a weighted average asset life of less than 15 years, asset acquisition is a key focus. Management aims to make the InvIT a 'perpetual vehicle'. A pipeline of HAM assets from the Sponsor Group is identified, with VM7 and Pathankot-Mandi expected to be completed in FY25, and Chittoor-Thachur in FY26, making them available for offer to the Trust. Management acknowledged that acquiring new assets via debt could have a short-term negative impact on cash flows but would improve the overall payout and life of the InvIT in the long run.

Tariff Hikes and Project-Specific Updates

A tariff revision was implemented from June 3, 2024, delayed due to the election code of conduct. Four projects—Talegaon Amrawati, Jaipur Deoli, Tumkur Chitradurga, and Amritsar Pathankot—received an effective tariff rate revision of approximately 2.5%. The Talegaon Amravati project, in particular, has shown a positive recovery in toll revenue since February 2024, with the momentum continuing.

Concession Extension Mechanism

In the Q&A, management detailed the 'target traffic clause' for concession extensions, which is independent of other extensions like those for COVID. It involves a one-time, three-year traffic survey against a pre-defined target. A shortfall can trigger an extension of up to 20% of the original tenure (e.g., 3 years on a 15-year concession), while excess traffic can lead to a reduction of up to 10%. This provides a contractual mechanism to mitigate traffic risk.

Refinancing and Future Outlook

The refinancing of the Trust debt and VK1 SPV debt is being executed in a phased manner. Documentation with the lender is complete, and 50% of the refinancing has been availed. The refinancing of the VK1 SPV debt is currently awaiting approval from NHAI. Looking ahead, management expects payouts for the next 2-3 years to be at a similar level to the present, with a potential for a 'maybe 50 paisa increase'.

This is an AI-generated summary of a publicly available earnings call transcript.
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