IndInfravit Trust Management Discussions

Global Outlook and Indias perspective1

The World Bank has released its report of 2024 which shows that the global economy is projected to experience the slowest half-decade of GDP growth in three decades, with a growth rate of 2.4% in 2024. As per International Monetary Fund (IMF), global growth, estimated at 3.2 percent in 2023, is projected to continue at the same pace in 2024 and 2025.

The medium-term outlook has worsened for many developing economies due to factors, which includes slowing growth, sluggish Global Trade, and tight financial conditions. However, the risk of a global recession has receded, attributed to the strength of the US economy, resulting in a better global economic position than the previous year. But, mounting geopolitical tensions could create fresh near-term hazards for the world economy. Emerging markets and developing economies (EMDEs) are set to make limited progress catching up to advanced economy levels of per capita income; excluding China and India, no relative gains are projected between 2019 and 2025 as depicted herein below chart.

In 2025, growth is projected to strengthen in most regions coinciding with an expected step-up in global growth. South Asian Region is projected to remain the fastest-growing EMDE region over the forecast horizon, led by strong growth in India underpinned by resilient domestic demand. Growth in SAR is estimated to have slowed slightly, from 5.9 percent in 2022

to a still-strong 5.7 percent in 2023—still the fastest of all EMDE regions. This primarily reflected a robust expansion in India, which accounted for more than three-fourths of regional output in 2023. Robust growth in India is mostly due to strong domestic demand: fixed investment is forecasted to continue expanding rapidly amid rising public infrastructure spending and strong private-sector credit growth, backed by solid corporate sector balance sheets.

As per World Bank in its aforesaid report states that India is anticipated to maintain the fastest growth rate among the worlds largest economies, but its post-pandemic recovery is expected to slow, with estimated growth of 6.3 percent in FY2023/24. Growth is then expected to recover gradually, edging up to 6.4 percent in FY2024/25 and 6.5 percent in FY2025/26. As per IMF in their World Economic Outlook also states that growth in India is projected to remain strong at 6.8 percent in 2024 and 6.5 percent in 2025, with the robustness reflecting continuing strength in domestic demand and a rising working-age population.

Infrastructure Push and Economic Development in India2

In the year 2021, the Government of India launched the PM Gatishakti National Master Plan (GSNMP) with a focus on multimodal connectivity infrastructure by bringing together the infrastructure schemes such as Bharatmala, Sagarmala, UDAN etc. under a digital platform. The GSNMP offers a database of infrastructure, ongoing and future projects carried out by different ministries/departments of both the Central Government and States/UTs. Further, the GSMNP has been integrated with the PM Gatishakti platform (GIS-enabled), for robust/integrated planning, design, and monitoring of next-generation infrastructure projects at a single place. As per the India Investment Grid (IIG) database, there are currently about 19698 projects worth $2194 Bn at various stages of development.

Alongwith the GSNMP, the National Logistics Policy, addresses the development of integrated infrastructure and efficiency in services, including processes and regulatory frameworks, through its Comprehensive Logistics Action Plan (CLAP). The NMP and the National Logistics Policy together provides a framework for creating a data-driven decision support mechanism to enhance logistics efficiency and reduce costs in the countrys logistics ecosystem.

3Indias journey towards becoming a developed nation by 2047 and achieving USD 30 trillion economy, is significantly founded on, inter alia, building world class infrastructure in both rural and urban areas, fostering green growth, becoming self-reliant in key sectors (defence and space).

The governments commitment is apparent through its capital outlay allocation of 3.4% of GDP to the infrastructure sector in the fiscal year 2025, a whopping allocation of USD 133.9 billion (INR 11.11 trillion). Roads & Highways account for the highest share about 25%, followed by Railways and Urban Public Transport. The government has set ambitious targets for the transport sector, including development of 2 lakh-km national highway network by 2025 and expanding airports to 220. Additionally, plans include operationalizing 23 waterways by 2030 and developing 35 Multi-Modal Logistics Parks (MMLPs). The status of MMLPs is depicted as under:

The total budgetary outlay for infrastructure-related ministries has been significantly increased over last 10 years, offering investment prospects for the private sector across various transport sub-segments. As the transport sector gears up to address sustainability challenges, the private sector stands poised to capitalize on the conducive policy environment to accelerate infrastructure investments. Public-Private Partnerships (PPPs) have served as a vital mechanism for private sector engagement across various infrastructure domains, notably in the construction of airports, ports, highways, and logistics parks throughout India. As of November 2023, there were 352 PPP projects worth US$ 76.95 billion.

Besides support from the central government and states across various schemes, India needs a significant push from PPPs to achieve its goal of reaching a $5 Trillion economy by 2025.

Road Sector4

With a colossal road network spanning an impressive 6.67 million km, India secures its position as the second-largest in the world. This intricate network encompasses 146,145 km of National Highways (NH), 179,535 km of State Highways (SH), and 6,345,403 of other roads. The past 9 years have witnessed remarkable expansion, with National Highways surging by over 60% from the year 2014 to year 2023.

Highways in India

A total of 202 national highway projects worth INR 79,789 crore (US$ 9.59 billion) are at the implementation stage in the country and are 6,270 km in length. Indias Gati Shakti program has consolidated a list of 81 high impact projects, out of which road infrastructure projects were the top priority. The major highway projects include the Delhi-Mumbai expressway (1,350 kilometres), Amritsar-Jamnagar expressway (1,257 kilometres) and Saharanpur-Dehradun expressway (210 kilometres). The main aim of this program is a faster approval process which can be done through the Gati shakti portal and digitized the approval process completely.

India will fast-track building of national highways including high-speed access-controlled highways to create a world- class road network by year 2037 and 237,000 km by year 2047, to enhance efficiency and reduce logistic costs as it seeks to become a developed nation by year 2047. The plan is to increase the national highways to over 200,000 kms from 146,145 kms with over 10-fold jump in access-controlled highways to 50,000 kms from currently about 4,000 kms.

Considering the importance of roads to the economy, the MoRTH has increased the pace of national highways construction by incredible 143% to 28.3 kms per day in 2023 from 2014, which special focus on increasing the number of lanes on the existing national highways, the same is depicted as under:

The Bharatmala Pariyojana was launched by the Government of India with the primary focus on enhancing the efficacy of the freight movement and people travel across the country. The Phase I of the Bharatmala Pariyojana, was approved in October 2017, which emphasised on filling the gaps in infrastructure requirements by development of 34,800 km of National Highways. The Pariyojana has accentuated a "corridor based National Highway development" for ensuring infrastructure symmetry and consistent road user experience. The key components of the Pariyojana are (a) Economic Corridors development, (b) Inter-corridor and feeder routes development, (c) National Corridors Efficiency Improvement, (d) Border, and International Connectivity Roads, (e) Coastal and Port Connectivity Roads and (f) Expressways.

The status of Bharatmala Pariyojana Phase 1 estimates the development of a total of 34,800 km spread across in 31 States and UTs encompassing 550+ Districts. The Government has awarded works for its development for 27,384 km, of which, about 15,045 km is constructed. The phase 1 of Pariyojana is expected to completed by FY2027-28. Additionally, the Government has targeted to build 22 new greenfield expressways, signalling significant advancements in Indias road infrastructure.

The market for roads and highways in India is projected to exhibit a CAGR of 36.16% during 2016-2025, on account of growing government initiatives to improve transportation infrastructure in the country. In order to conducive support the growth story, the following are the recent policy changes that MoRTH and NHAI have undertaken to in order to improve private participation in the sector and increase competition:

a) Changes in the Hybrid Annuity Model (HAM) concession agreement aimed at protecting developers returns and easing their cashflows during construction period.

b) Changes in the Build-Operate-Toll (BOT) concession agreement in order to reinstate developer interest in the model.

c) Monetizing toll-operate-transfer (TOT) projects.

The government plans to raise the share of BOT projects from the current sub-5 per cent to around 10 per cent in the next two years and around 35 project are identified on TOT model.

5The highways sector in India has been at the forefront of performance and innovation. The government has successfully rolled out over 60 road projects in India worth over $10 Bn based on the HAM. HAM has balanced risk appropriately between private and public partners and boosted PPP activity in the sector. Asset recycling, through the TOT model has been taken up by the National Highways Authority of India

(NHAI) for 100 highways. The first two bundles of 9 highways each were monetized successfully for an investment of over $2 Bn in the year 2023.

The MoRTH has been undertaking various strategic initiatives for the holistic development and growth of the Road Sector like improving safety (fire safety in buses, BNCAP, revamping of vehicle capacity, reconstitution of NRSC, Nirbhaya framework, etc.), sustainability (real driving emissions regulations, green mobility, alternative fuels, hybrid, vehicle scrapping policy, etc.), introduction of BH series vehicle registration numbers, rationalization of all-India tourist permits process, digitization of process (Vahan platform), enhanced road user experiences (FASTag, digital highway development through OFC network), Parvatmala programme and capacity and capability building (IAHE, IRC guidelines, etc.)

Road Sector Infrastructure Investment Trust (InvIT or Business Trust)6

One of the plausible and optimal avenue for the monetization of road assets is by way of divestment of the same in an InvIT. Since, 2017, InvIT has played a key role in raising fresh capital. As per deals tracked by India Infrastructure Research, during 2017-22, more than 50 asset sale deals in the road sector have raised over INR 900 billion. Investors including CPP Investments, Omers, ACP, I-square, ADIA, KKR, the National Investment and Infrastructure Fund (NIIF), OTTP, and CDPQ have been actively investing in the sector through primarily, infrastructure investment trusts (InvITs). Owing to inflation- indexed toll charges, regulated assets like toll roads have emerged as attractive assets for institutional investors.

The InvIT as a means of monetisation has gained popularity in the road sector which is expected to corner about 75% of total fresh inflows in InvITs/REITs. Multiple regulatory interventions have improved the attractiveness of the product.

The NHAI has been actively exploring alternative financing mechanisms to raise funds. The toll-operate-transfer (TOT) model, launched in 2016, is one such route through which NHAI monetises its highway assets to private players for a minimum period of 15 years. So far, the authority has successfully raised about Rs 330 billion through the award of seven TOT bundles spanning over 2,010 km.

NHAI also raised INR 102 billion by monetising 636 km of projects through an InvIT, becoming the first public sector agency in the country to launch a business trust. Meanwhile, NHAI has floated a corridor-specific special purpose vehicle (SPV) that allows investors to finance large-scale road projects during the construction phase. Till March 2023, INR 335.61 billion has been raised through the SPV for the Delhi-Mumbai Expressway.

MoRTH plans to raise INR 350 billion through asset monetisation in 2023-24, including INR 100 billion each through InvITs and TOT, and INR 150 billion through project-based financing for other flagship corridors. The trend is expected to continue with increasing foreign investor participation.

7As per Crisil ratings, the roads sector will continue to dominate the InvIT, accounting for almost three-fourths of the INR 1.0 - 1.5 trillion additional AUM expected in FY25. This is due to the strong availability of road assets, driven by the healthy pace of infrastructure creation and many assets being ripe for monetisation.

Assets under management (AUM) of infrastructure investment trusts (InvITs) in the road sector are estimated to nearly double by March 2025 from INR 1.4 lakh crore at present. The asset composition of these InvITs is expected to change with the hybrid annuity model (HAM) projects forming a substantial portion of the incremental AUM.

The consolidated loan to value ratio of road InvITs, which is an indicator of leverage, is currently at ~41%. As the InvITs have, historically, shown intent to maintain balanced mix of debt and equity, leverage should remain comfortable at 45-47% by March 2025. Continued investor interest will also augur well for growth of InvITs. At present, more than 60% of the equity invested in road InvITs has been contributed by foreign investors and a sizeable share of this is through patient capital such as pension funds and sovereign wealth funds, which provide stability.

The regulatory framework permits the banks and financial institutions to lend to InvITs, enhancing liquidity and security for lenders. Additionally, SEBIs endeavour to standardize the financial reporting and disclosures contribute to investor confidence and transparency within the sector. With a robust regulatory framework and tapping further into capital markets, InvITs are looking more and more promising to become the ideal route for the development of the infrastructure in India, which has led to positive impact on the growth trajectory of InvITs.

InvITs offer investors with opportunities for fixed income, stable cash flows with higher yields, and also diversification opportunities for capital outlay, without the risks associated with, infrastructure construction/developments and typical costs and time overruns, and therefore, the category of primary investors in the InvIT will remain long-term entities like domestic and international pension funds and insurance companies.

Looking ahead, industry experts anticipate further growth and participation in Indias InvIT market. The Government initiatives to promote infrastructure development and improve the ease of doing business are expected to bolster investor confidence and stimulate investment activity. As regulatory frameworks evolve and awareness of these investment vehicles increases, InvITs are poised to play a significant role in driving the development and growth of the infrastructure sector in India.

Growth Plans & Future course

Our initial formation portfolio in the year 2018, comprised of 5 projects reflecting aggregate value of INR 47,000 million. Post that, we acquired 12 projects reflecting an aggregate value of about INR 150,000 million, of which 4 projects aggregating to value of INR 82,770 Million were acquired during the FY 2023-24. We intend to continue our existing growth pace on the foundation of Indias growth story, various road infrastructure projects planned by the NHAI, Government monetization plan and strong fundamentals of environment pertaining to the InvITs including renewed/ revamped large/foreign interests of institutional investors investing in InvITs, backed by our strengthening systems and process and aligned and integrated Investment Management and Project Management.

On the back of robust financial and operational performance of the project portfolio, we have made 14 distributions since listing in year 2018, aggregating to total value of INR 33,868 million, equivalent to distribution of INR 52.24 per unit. We believe the momentum will continue with expected strong traffic growth, improved vehicle sales and acquisition of new projects.

Our Core Resource - Human Resource

Interise has a multi-faceted workforce that collaborates to maintain high service standards while adhering to the industrys best practices in HR policies. We attract top talent and empower them to build an inclusive work environment and encourage cross-functional collaboration with linkages to organisational goals.

Each of our portfolio companies are staffed with professionally qualified employees, who discharge their respective obligations and duties as required for any business concern to function efficiently and effectively in accordance with our value systems and with due techno-commercial support from our project management company or investment management company.

Committed to growth, we empower employees through various training programmes, leadership development modules and various engagements. These initiatives include service and process training, behavioural training, self-management programs and training on ethics, values and code of conduct. We emphasise on the organisational fit and creating robust pipeline of talent at all management levels.

Engaging employees through newsletters, virtual sessions, workshops, regular reviews and feedback, we also provide platforms for interaction with business leaders, industry association, regulatory authorities and informal engagement with their family. In order to foster performance culture, we offer performance-based incentive.

Diversity and inclusion are innate to our organizational philosophy. We actively promote gender diversity and provide equal opportunities for all individuals within our workforce. We are committed to fostering an inclusive workforce and recognise the vital contributions of our on-field women employees across various operational roles apart from better working environment at our corporate/regional offices. We believe in empowering women by providing them with opportunities to grow and succeed in diverse roles, highlighting our commitment to gender diversity and inclusion.

Control systems

We maintain robust internal control procedures tailored to its size and activities. We believe that safeguarding assets and enhancing operational efficiency is achievable through the implementation of adequate internal controls and the standardization and benchmarking of operational processes. These internal controls and risk management mechanisms adhere to the principles and criteria outlined in our governance framework. These are seamlessly integrated into the overall organisational structure and across functions, involving various personnel who collaborate effectively in fulfilling their respective duties. The Board of Directors provide guidance and strategic oversight to the management apart from overseeing and monitoring of various committees of the Board.

Cautionary statement

The statements made in the Management Discussion and Analysis describing the Companys objectives, projections, estimates, expectations, which may be "forward-looking statements" within the meaning of applicable securities laws & regulations. Actual results could differ from those expressed or implied. Important factors that could make a difference to the Companys operations include economic conditions affecting demand-supply and price conditions in the domestic & overseas markets in which the Company operates, changes in the government regulations, tax laws & other statutes & other incidental factors.