Industry Review
India has the second-largest road network in the world, spanning over
6.3 million kms. Over 64.5% of all goods in the country are transported by roads, while
90% of the total passenger traJic uses road network to commute. As of November 30, 2022,
the total length of National Highways in the country was 144,634 km. Also, roads form a
signifiicant portion of the national monetization pipeline, with national highways. The
government has decided to monetize the road assets worth Rs.1.6 trillion, by 2024_25. The
National Highway Authority of India has a project bank of 20,000 km of completed roads.
NHAI is offering these roads in bundles and will be offering projects worth Rs. 40,000
crore in the next two financial years.
National Highways play a very important role in the economic and social
development of the country by enabling eJicient movement of freight and passengers and
improving access to markets. Therefore, the Ministry of Road Transport and Highways
(MoRTH) and its implementing agencies have implemented multiple initiatives in the last 8
years to augment the capacity of the National Highway infrastructure in India. In the
Union Budget 2023_24, the government has decided to raise the allocation towards the
Ministry of Roads by some 36% to Rs. 2.7 lakh crore (US$ 32.6 billion) for 2023_24.
(Source: Infrastructure sector in India, Industry Report by IBEF).
By seeing this positive opportunity, InvITs as collective investment
scheme has brighter future in coming years. InvITs allow developers to monetize their
assets by pooling multiple infrastructure assets under a single entity. Also, InvITs are
popular among investors, especially in the case of long-term revenue-generating assets
such as toll roads.
The Union Budget FY 2023_24 has laid out the vision for guiding India
by adopting 7 key priorities or ‘Saptarishis. Infrastructure and Investment are
one of the key priorities of the Government. The government has decided to raise the
allocation towards the Ministry of Roads by some 36% to Rs. 2.7 lakh crore (US$ 32.6
billion) for 2023_24.
The MoRTH has envisaged an ambitious highway development programme -
Bharatmala Pariyojana. The programme focuses on optimizing eJiciency of freight and
passenger movement across the country by bridging critical infrastructure gaps through
effective interventions like development of Economic Corridors, Inter Corridors and Feeder
Routes, National Corridor EJiciency Improvement, Border and International Connectivity
roads, Coastal and Port Connectivity roads and Green-field expressways. Multi-modal
integration is also built into this program.
Pradhan Mantri (PM) Gati Shakti National Master Plan (NMP)
The Pradhan Mantri GatiShakti- National Master Plan as a critical tool
for integrating economic and infrastructural planning and development. Under this Master
Plan, 100 critical infrastructure gap projects have been prioritized by the government for
development in FY 2023_24 and Rs. 75,000 Cr. have been allocated for the same. Similarly,
with multimodal infrastructure development, Indias logistics cost will reduce,
improving ease of living and ease of doing business in the country. (Source: Press release
by MoRTH on highlights of the Union Budget 2023_24).
Rising foreign direct investment (FDI) in the sector
The Government has put in place an investor-friendly policy, wherein
100% Foreign Direct Investment (FDI) is allowed under the automatic route in the road and
highways sector.
Outlook
The InvIT predominantly has fixed annuity assets and being a Trust, it
enjoys various tax benefits which can potentially increase the post-tax revenue for the
company. The Governments ambitious infrastructure development programmes provide
signifiicant opportunities for investors and market players to help transform the sector
and partner in Indias socio-economic progress. Robust demand, higher investments,
attractive opportunities and policy support changed the face of the road sector in the
country in the last few years. The government is implementing various projects across the
length and breadth of the country to solve the woes of the common man. The MoRTH has
introduced notable trends that will make India take the lead position in road
infrastructure in the times to come.
Furthermore, there are tremendous opportunities in the near and long
term for the infrastructure space in India.
Activities of the Trust
InvIT as an investment platform offers attractive investment
opportunities and is expected to take _light, given the huge government outlay for
infrastructure projects. The government has identifiied InvIT as a way to attract large
institutional long-term investors in the infrastructure space, to allow for capital
recycling and further investments under PPP mode. InvIT plays a key role in the
monetization of existing projects with conducive regulatory frameworks, cash flow
profiles, and taxation advantages.
InvIT helps developers to release their invested equity and deploy
capital in new projects. This could enable them to address the challenge of projects with
high capex demands. Another advantage of InvIT is that proceeds raised from such vehicles
are neither counted as debt nor as equity and provides regular return on capital infused,
by way of distribution.
Net Distributable Cash Flow (NDCF)
For FY 2022_23 the Net Distributable Cash Flow (NDCF) of the Shrem
InvIT is Rs. 57,029.19 Lakhs, the Trust has distributed at least 90% of NDCF. The total
pay-out from the NDCF for FY 2022_23 is Rs. 13.854 per unit to the unitholders.
Distribution
As per SEBI InvIT Regulations, 2014, InvIT shall distribute to the
unitholders not less than 90% of net distributable cash flows, once in every six months in
every financial year and payment shall be made not later than fifteen days from the date
of declaration.
Shrem InvIT has made distributions four times during the financial year
on a quarterly basis in accordance with its Distribution Policy. Details of four
distributions during the financial year is as follows:
| Sr. No. Total amount of distribution per Unit (Rs.) |
Payment date of distribution |
Dividend per Unit (Rs.) |
Distribution consists of Interest per
Unit (Rs.) (Subject to applicable taxes) |
Return of Capital per Unit (Rs.) |
| 1 3.404 |
May 06, 2022 |
0.000 |
0.366 |
3.038 |
| 2 3.550 |
August 02, 2022 |
0.000 |
0.967 |
2.583 |
| 3 3.500 |
October 27, 2022 |
1.000 |
0.781 |
1.719 |
| 4 3.400 |
January 30, 2023 |
0.404 |
0.424 |
2.572 |
Factors Affecting the Results of the Operation of the InvIT
The Project SPVs business, prospects, results of operations and
financial condition are affected by a number of factors, including the following key
factors:
Economical Challenge
The performance and growth of our business is highly dependent on the
performance of the Indian economy, which, in turn, depends on various factors. The Indian
economy may get affected by recent global economic uncertainties, volatility in interest
rates, currency exchange rates, commodity and electricity prices, adverse conditions
affecting agriculture and various other macroeconomic factors.
Sectoral Challenge
Our business is highly dependent on the state of development of the
Indian economy and the macroeconomic environment prevailing in India. Since the use of our
Projects, our expansion plans and future projects depend or will depend on macroeconomic
factors that may negatively impact the demand of development of road infrastructure
projects in India, or timely commencement of their operations could in turn have a
material adverse effect on our growth prospects, business and cash flows. In addition,
access to financing may be more expensive or not available on commercially acceptable
terms during economic downturns. Any of these factors and other factors beyond our control
could Influence outcomes.
The Project SPVs are entitled to certain benefits under Section 80fiA
of the Income Tax Act, 1961, as amended if certain conditions are satisfiied. However, the
benefits of the Project SPVs may expire at various points in time. Any expiry, termination
or Government of Indias withdrawal of these tax benefits could result in an increase
in the Trusts tax expenses, thereby adversely affecting the Trusts, or the
Project SPVs results of operations and cash flows.
Political Challenge
The Government of India is focusing to encourage private participation
in the infrastructure sector, however any adverse change in policy could result in a
further slowdown of the Indian economy. Any signifiicant changes in a particular
governments policy for the road infrastructure sector could have a signifiicant
effect on the Trusts revenues, expenditure and growth prospects as they relate to
future projects. The results of operations of future projects are likely to be affected by
budgetary allocations made by the various central and state government agencies for the
infrastructure sector as well as funding provided by international and multilateral
development finance institutions for road infrastructure projects.
Further, trends in particular governments approach to
infrastructure – such as slowdowns in the volume of build- operate-transfer projects
for which concessions are granted – may be likely to affect the Trusts
business, financial condition and results of operations. Policies relating to tolling
methodologies, exemptions and changing political or social imperatives can also affect the
Trusts or the Project SPVs businesses.
Business Challenge
In some of our concession agreements, our income from interest on
balance completion cost is linked with RBI Bank Rate and income from operation and
maintenance is linked with the movements of Inflation indices in a relevant period.
However, there are no specifiic provisions in our concession agreements protecting us
against increases in interest rates on our borrowings or cost of raw materials except to
the limited extent of rates linked to RBI Bank Rate and Inflation. Our lenders may have
the right to periodically adjust our interest rates and our applicable interest rates may
increase based on their review of our credit profile and perceived risks in our
operations. Our operational costs may also increase substantially if the O&M
Contractor fails to perform its duties as per the O&M Agreements. Many factors causing
such adverse changes are beyond our control, and we are usually not able to demand
matching increases in our tolling rates or annuities. Even if we invoke the Inflation
adjustment clauses in some of our concession agreements, the increase may not be adequate
to offset the negative impact of increases in interest rates or the O&M costs.
In our annuity BOT projects or BOT projects with an annuity component,
our annuity revenue depends on the fixed amounts paid to us by our government clients. The
amount of annuity is not necessarily linked to our actual costs of construction and may
only be deducted pursuant to the relevant concession agreements. In our toll-based
projects or projects with a toll component, our toll revenue depends on the tolling rates
set by the relevant concessioning authority in accordance with the relevant concession
agreements and the actual traJic volume using our roads. Our decision to undertake BOT
road projects is largely based on our estimate of our expected toll revenue, which in turn
partly based on our estimate of the traJic volume using our roads.
TraJic volume may be affected by a number of factors beyond our
control, including general economic conditions, alternate routes, alternate means of
transportation, location of toll plazas, weather conditions, demographic changes, fuel
prices, reduction in commercial or industrial activities in the regions served by the
roads and natural disasters. Thus, the actual traJic volume may be lower than our
estimate. Decreases in traJic volume could result in a signifiicant loss of our toll
revenue. In addition, our concession agreements typically limit and regulate increases in
tolling rates. Usually, the NHAI sets the applicable tolling rates, and we may not be able
to increase tolling rates to cover increases in our operational costs. In some of our
concession agreements, adjustments of annuities are linked to the movements of Inflation
indices in a relevant year.
However, there are no provisions in our concession agreements
protecting us against increases in interest rates or cost of raw materials. Our lenders
may have the right to periodically adjust our interest rates and our applicable interest
rates may increase based on their review of our credit profile and perceived risks in our
operations. Our operational costs may also increase substantially during the operation of
our BOT projects due to shortage of raw materials or substantial increases in prices of
raw materials required for operation and maintenance beyond the permitted scope of
adjustment due to occurrence of certain events under the relevant provisions of the
concession agreements. Many factors causing such adverse changes are beyond our control,
and we are usually not able to demand matching increases in our tolling rates over and
above fixed increase of 3% and 40% of variation in WPI or annuities. Even if we invoke the
Inflation adjustment clauses in some of our concession agreements, the increase may not be
adequate to offset the negative impact of increases in interest rates or cost of raw
materials.
Under the relevant concession agreements, our Project SPVs have rights
to construct and operate the road projects exclusively for fixed periods of time and we
receive annuities and/or tolls, as the case may be, for the use of our roads. However, we
may be faced with competition from new roads developed by State Governments, which are not
within our control. For example, MPRDC has the right to construct competing roads after a
prescribed period, pursuant to the terms of the concession agreements. State Governments
may not always charge for the use of these roads. There can be no assurance that our road
projects will compete effectively against such roads that connect the same locations. Any
material decrease in the actual traJic volume as compared to our forecasted traJic volume
could have a material adverse effect on our cash flows from our tolling projects, which in
turn can adversely affect our business, prospects, financial condition and results of
operation.
As our BOT projects often require signifiicant capital investment with
potential returns spread over a long period of time, inadequate toll revenues and
annuities collected from our projects may result in a low return or even loss on our
investment, which may adversely affect our liquidity, business, financial condition and
results of operation.
Summary of Signifiicant Accounting Policies
A summary of the signifiicant accounting policies applied for the
preparation of the financial statements of Shrem InvIT is provided in the notes of the
Consolidated Financial Statements. Kindly refer note no. 2 of the Consolidated Financial
Statements for the details.
Internal Control and Systems
Shrem InvIT has robust internal control system to manage its
operations, financial reporting and compliance requirements. The investment manager has
clearly defined roles and responsibilities for all managerial positions. All the business
parameters are regularly monitored, and effective steps are taken to control them. Regular
internal checks are undertaken to ensure that responsibilities are executed effectively.
The audit committee of the Board of Directors of Investment Manager periodically reviews
the adequacy and effectiveness of internal control systems and suggests improvements to
further strengthen them.
Cautionary Statement
Statements in this Management Discussion and Analysis describing the
InvITs projections, estimates, expectations or predictions and those are forward
looking statements within the meaning of applicable laws and regulations. The Trust has
undertaken various assessments and analysis to make assumptions on future expectations on
business development. However, various risks and unknown factors could cause differences
in the actual developments from our expectations.
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