Bharat Highways InvIT
- Bharat Highways InvIT is coming out with an initial public offering (IPO) of 18,72,95,850 shares in a price band Rs 98-100 per equity share.
- The issue will open for subscription on February 28, 2024 and will close on March 01, 2024.
- The shares will be listed on BSE as well as NSE.
- Book running lead managers to the issue are ICICI Securities, Axis Capital, HDFC Bank and IIFL Securities.
- Compliance Officer for the issue is Mohnish Dutta.
Profile of the company
Bharat Highways InvIT is an infrastructure investment trust established to acquire, manage and invest in a portfolio of infrastructure assets in India and to carry on the activities of an infrastructure investment trust, as permissible under the SEBI InvIT Regulations. It was settled by way of the Original Trust Deed, by GRIL (the Settlor), and registered as an infrastructure investment trust with SEBI on August 3, 2022 pursuant to the SEBI InvIT Regulations. The Sponsor is engaged in testing services in the field of transportation engineering and has expertise in NSV survey, FWD survey, pavement design of roads and airports, physical and chemical testing of soil, lime, cement, road roughness testing, concrete and bituminous mix design of road projects. The Sponsor has setup a laboratory at its registered address which is accredited with National Accreditation Board for Testing and Calibration Laboratories for the discipline of chemical, mechanical and non-destructive testing. NMHPL, the Associate of the Sponsor is a road engineering, procurement, and construction company, with experience in design and construction of various road/highway projects. NMHPL has over six years of experience in the execution of infrastructure projects since 2017.
The Sponsor has an established track record of physical and chemical testing of soil and other material (cement testing, fly ash, bitumen emulsion, aggregate testing) at its laboratory accredited by NABL, which enables it to determine the appropriate material mix for development of bituminous and concrete road projects. Further, its capability to assess the roughness and balance life of road projects allows it to determine the appropriate maintenance activity to be undertaken on the road projects. The Sponsor through itself and its Associate, NMHPL, complies with the eligibility requirements under the SEBI InvIT Regulations of ensuring a sound track record in development of infrastructure.
Its initial portfolio assets consist of seven road assets, all operating on HAM basis, in the states of Punjab, Gujarat, Andhra Pradesh, Maharashtra and Uttar Pradesh. These roads are operated and maintained pursuant to concession rights granted by the NHAI and are owned and operated by the Project SPVs, which are currently wholly owned by GRIL.
Proceed is being used for:
- Providing loans to the Project SPVs for repayment/ pre-payment, in part or in full, of their respective outstanding loans (including any accrued interest and prepayment penalty).
- General purposes.
Industry overview
The development of the infrastructure sector has been a priority area for the Government and has witnessed enhanced public investment over the years. The infrastructure sector comprises roads, railways, power, ports, telecommunication and civil aviation among others. The size and magnitude of major infrastructure development projects dictate substantial capital investment. Many reforms have been initiated in the infrastructure sector, resulting in a robust growth. The Government has introduced policy reforms which resulted in a cumulative FDI equity inflow of $32.08 billion in construction activities in infrastructure from Fiscal Year 2001 to six months ended September 30, 2023.
In the Fiscal Year 2020, the Government focused on enhancing expenditure in the infrastructure sector and has planned to invest more than Rs 100 trillion in the infrastructure sector in the next five years as part of the National Infrastructure Pipeline (NIP) announced in December 2019. The Government launched the NIP with a forward-looking approach and with a projected infrastructure investment of around Rs 111 trillion during Fiscal Years 2020 - 2025. The NIP currently has 8,964 projects with a total investment of more than Rs 108 trillion under different stages of implementation. Out of the total capital outlay under the NIP, 55% are under implementation, 16% are at a conceptual stage and 29% are under development stage. Sectors such as commercial infrastructure, energy, social infrastructure and transport amount to 4.6%, 20.4%, 13.9% and 43.5% respectively out of the total capital outlay.
The Government has taken several initiatives for development of roads and highways in India. Bharatmala Pariyojana is an umbrella program for the highways sector that focuses on optimizing efficiency of freight and passenger movement across the country by bridging critical infrastructure gaps through interventions including development of economic corridors, inter corridors and feeder routes, national corridor efficiency improvement, border and international connectivity roads, coastal and port connectivity roads and green-field expressways. It envisages a corridor approach in place of the existing package-based approach which has, in many cases, resulted in skewed development. Bharatmala Pariyojana envisages development of about 26,000 km length of economic corridors, which along with Golden Quadrilateral and North-South and East-West Corridors are expected to carry majority of the freight traffic on roads. The scheme will include the existing NHDP programme as well.
Pros and strengths
Sizeable portfolio of stable revenue generating assets: The company will own an initial portfolio consisting of seven InvIT Assets having an aggregate length of approximately 497.292 km located on national networks across five states in India. The projects are located on national highway networks that experience both commercial and passenger vehicular traffic. In addition, each Project SPV has entered into a long-term Concession Agreement with the NHAI, with each agreement having a residual operations period of between 11.07 and 13.51 years as of January 31, 2024, thereby will be providing long-term cash flows to the InvIT. On a collective basis, the InvIT Assets had a weighted average (based on bid project cost) residual project life of approximately 11.99 years as of January 31, 2024.
Geographically diversified road asset portfolio and revenue base: The InvIT Assets consist of seven operational HAM assets located across five states of India. The geographic diversity of the InvIT Assets will play a major role in developing its experience and expertise, including its ability to evaluate, acquire, operate and maintain new projects. The Concession Agreements of the Project SPVs are also temporally diverse and are expected to expire at different times. The residual terms of the operations period range between 11.07 years and 13.51 years as of January 31, 2024. Its temporally and geographically diverse project portfolio and its expertise leveraged from existing projects provide it with an advantage in capitalizing on new opportunities available in the roads and highways sector. This diversification strengthens its business by reducing its reliance on any specific project and reducing the potential impact on its business of any economic slowdown or force majeure event or with respect to any particular project.
Growth opportunities and rights to expand portfolio of assets: Through the proposed ROFO Agreement, the company will have a right of first offer to acquire certain assets of GRIL, its proposed significant Unitholder and the current majority shareholder of the Project SPVs, including the projects currently owned by GRIL or which may be acquired or developed by GRIL or its existing or future subsidiaries. This access to future road assets of GRIL or its existing or future subsidiaries will be an important source of the InvIT’s growth in the future.
Hedge against adverse interest rate movements: The NHAI hybrid annuity projects provide a natural hedge against the risk of adverse interest rate movement. In addition to the annuity payments due under the respective Concession Agreements during the operations period, NHAI is required to pay interest on the reducing balance of the completion cost (equivalent to 60.00% of the bid project cost) throughout the operation period at the rate of 3.00% above the RBI bank rate. Accordingly, any increase in the interest payable on loans with floating interest rates by the InvIT due to an increase in interest rates gets offset by the increased revenues as a result of increase in interest on reducing balance of completion cost.
Risks and concerns
The InvIT is a newly settled trust and does not have an established operating history: The InvIT was set-up as an infrastructure investment trust on August 3, 2022 and registered with the SEBI and proposes to acquire 100% of the equity shares in each of the Project SPVs from GRIL. The InvIT does not have any operating history or its own historical financial information by which its past performance may be assessed. This will make it difficult for investors to assess its future performance. Growth prospects as an infrastructure investment trust can be affected by a wide variety of factors, including, inability to raise funds required for its operations, adverse developments in taxation regulations affecting its Unitholders, operational performance, distribution, and acquiring new assets. Any inability to meet these challenges could cause disruptions to its operations and could be detrimental to its long-term business outlook.
Revenue from its InvIT Assets is dependent on receiving consistent annuity income from NHAI: All of its InvIT Assets are operated on hybrid annuity basis. Pursuant to the relevant Concession Agreements, a fixed amount is paid semi-annually as annuity by NHAI. Any reduction or non-receipt of annuity income from NHAI may adversely affect its distributions. Further, as per the Projections of Revenue from Operations and Cash Flow from Operating Activities, the revenue from operations for Fiscals 2026, 2025 and 2024 arising from the seven InvIT Assets is projected to be Rs 5,846.05 million, Rs 6,202.61 million and Rs 6,783.85 million, respectively. Any adverse impact on the revenue from operations of the InvIT Assets will have an adverse impact on the business, cash flows and revenue from operations of the InvIT.
Dependent on various third parties to undertake certain activities for operation and maintenance of the InvIT Assets: The company will depend on the availability and skills of third-party employees and contractors pertaining to the operation and maintenance of the InvIT Assets. It can also make no assurance that the services of such third parties will continue to be available at reasonable rates in the areas in which it conducts its operations or at all. It may be exposed to risks relating to the inability of such third parties to obtain requisite approvals for the operation and maintenance activities, as well as the quality of their services, equipment and supplies. It may also be exposed to civil and criminal liability in relation to the actions of other third parties, including its employees and contractors. It can make no assurance that such contractors or their sub-contractors will continue to hold or renew valid registrations under the relevant labour laws in India or be able to obtain the requisite approvals for undertaking such construction and operation. Furthermore, in case of failure by the sub-contractor to pay the labour costs of the workers engaged by them, it may be liable to pay such costs to the contracted labourers. Any violation of the provisions of the Contract Labour Act by the Project SPV may result in penalties pursuant to the provisions of the Contract Labour Act.
May face limitations and risks associated with debt financing: The company is subject to regulatory restrictions in relation to its debt financing and refinancing. It may from time to time require debt financing and refinancing to carry out the Investment Manager’s investment strategy. In the event that it undertakes debt financing or refinancing, it may be limited by Indian law as to the nature of financing or refinancing that it may undertake. Under the SEBI InvIT Regulations, the aggregate consolidated borrowings and deferred payments of the InvIT may not exceed 70% of the value of the InvIT assets. Any borrowings above 25% of the value of the InvIT assets are subject to certain conditions, including Unitholders’ approval. For borrowings up to 49% of the value of InvIT assets, the InvIT shall obtain: (a) credit rating from a credit rating agency registered with SEBI; and (b) seek Unitholders’ approval in the manner provided under the SEBI InvIT Regulations. Further for borrowings exceeding 49% of the value of the InvIT assets, the InvIT: (a) shall utilise the funds only for acquisition or development of infrastructure projects; (b) shall obtain the prescribed credit rating for its consolidated borrowing and proposed borrowing; (c) have a track record of at least six distributions on a continuous basis post listing in the year preceding the financial year in which the enhanced borrowings are proposed to be made; and (d) obtain the Unitholders’ approval in accordance with the SEBI InvIT Regulations.
Outlook
Bharat Highways InvIT is an infrastructure investment trust established to acquire, manage, and invest in a portfolio of infrastructure assets in India. The Trust is authorized to carry on the activities of an infrastructure investment trust under the SEBI InvIT Regulations. The Company's portfolio consists of seven roads, all of which are operated on a HAM basis in Punjab, Gujarat, Andhra Pradesh, Maharashtra, and Uttar Pradesh. These roads are operated and maintained based on concession rights granted by the NHAI and are owned and operated by the Project SPVs, which are currently wholly owned by GRIL. On the concern side, the InvIT is a newly settled trust and does not have an established operating history, which will make it difficult to accurately assess its future growth prospects. Moreover, all of its revenue from its InvIT Assets is dependent on receiving consistent annuity income from NHAI.
The company is coming out with an IPO of 18,72,95,850 equity shares. The issue has been offered in a price band of Rs 98-100 per equity share. On performance front, total income of SPV Group decreased 3.92% from Rs 16,001.80 million for Fiscal 2022 to Rs 15,374.70 million for Fiscal 2023, primarily due to a decrease in revenue from operations. Moreover, the company’s net profit for the year was Rs 5,270.47 million for Fiscal 2023 compared to Rs 628.68 million for Fiscal 2022.
The company intends to continue to manage its assets through the services of the Project Manager and the Investment Manager. The Project Manager is responsible for providing the Project SPVs management-related services and routine O&M services pursuant to the provisions of the Project Management Agreement. The Project Manager will also assist in managing project operating expenses. The roads sector is a highly competitive sector that is capital intensive and requires significant expenditure. Its ability to manage the costs associated with the InvIT Assets is critical to maintaining the Project SPVs’ profit margins. The Project Manager will also coordinate with the NHAI and local authorities to make sure that the new requirements of such agencies, to the extent reasonable, are complied with within each project timeline. Going forward, the Investment Manager intends to expand its initial portfolio by identifying and acquiring additional road projects that meet its investment objective in accordance with the provisions of the Amended and Restated Trust Deed.
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