IRB InvIT Fund Management Discussions.

1. Industry Review

1.1 Indias infrastructure opportunity

Infrastructure sector is a key driver for the Indian economy. Growing urbanization, demand for energy and financing needs for sustainable living pose a challenge for the infrastructural setup in the country. Infrastructure, and the lack of it, is envisaged as the primary growth constraint, while good infrastructure is widely recognised as an enabler of growth. In the coming era of supply chain disruptions, new technologies and reversal of financial deleveraging, infrastructure growth must keep pace with the need created for it. The sector is accountable for propelling Indias overall development and adores intense focus from Government for introducing policies that would ensure time-bound formation of world class infrastructure in the country. The opportunities in the sector have seen an incremental curve over previous years and are growing to establish the sector as a key driver in Indias development story at a high rate.

In December 2019, the Government launched the National Infrastructure Pipeline (NIP), an investment plan unveiled by the central government for enhancing infrastructure in identified sectors is a first-of-its-kind exercise to provide world-class infrastructure in an efficient manner across the country and improve the quality of life for all citizens. NIP will enable a forward outlook on infrastructure projects which will create jobs, improve ease of living, and provide equitable access to infrastructure for all, thereby making growth more inclusive. NIP includes economic and social infrastructure projects.

It is envisaged that during the FY 2020-25, sectors such as energy (24%), roads (18%), urban (17%) and railways (12%) amount to 71% of the projected infrastructure investments in India, with a total capital expenditure projected at Rs 111 lakh crores. The Centre (39%) and states (40%) are expected to have an almost equal share in implementing the NIP in India, followed by the private sector (21%). The roads sector is likely to account for 18% capital expenditure over FY 2019-25.

The FY 2020-21 was the challenging year for the Indias infrastructure sector as the country was trying to recover from the impact of the COVID-19 pandemic. The Government of India announced the Union Budget for FY 2021-22 which also focused on the NIP, since it will require a major increase in funding both from the government and the financial sector, the finance ministry has proposed to take three concrete steps to boost the NIP. Firstly, through institutional structures; secondly, by a big thrust on monetizing assets, and thirdly by enhancing the share of capital expenditure in central and state budgets.

Out of the total expected capital expenditure of Rs 111 lakh crore, projects worth Rs 44 lakh crore (40% of NIP) are under implementation, projects worth Rs 33 lakh crores (30%) are at conceptual stage and projects worth Rs 22 lakh crores (20%) are under development. Information regarding project stage are unavailable for projects worth Rs 11 lakh crores (10%).

The Government of India has given a massive push to the highway sector by allocating Rs118,101 crore (from Rs 91,823 crore in 2020-21), the highest ever outlay, for Ministry of Road Transport and Highways, of which Rs 108,230 crore is for capital expenditure for FY 2021-22. Under the Bharatmala Pariyojana, with an estimated investment of Rs 5.35 lakh crore, already 13,000 km of roads worth Rs 3.3 lakh crore have been awarded for construction.

1.2 Road and Highway sector

India has the second-largest road network in the world, spanning a total of 5.89 million kilometers (kms). This road network transports 64.5% of all goods in the country and 90% of Indias total passenger traffic uses road network to commute. Road transportation has gradually increased over the years with improvement in connectivity between cities, towns and villages in the country.

As per Ministry of Road Transport and Highways (MoRT&H), FY 2020-21 was the year of consolidation of the gains that accrued from major policy decisions taken in the previous five years, a time for monitoring of ongoing projects, tackling road blocks and adding to the already impressive pace of work achieved last year.

During the year the MoRT&H and its associated organizations have carried forward the good work of the previous years, expanding the National Highways network in the country, taking various steps to make these highways safe for the commuters and making best efforts to minimize adverse impact on the environment. As a result, in the past seven years, length of National Highways has gone up by 50% from 91,287 km (as of April 2014) to 137,625 km (as on March 20, 2021). The Ministry has scaled new heights in expanding the Highway infrastructure throughout the country, despite nation-wide lockdown due to COVID-19 pandemic in the FY 2020-21.

The MoRT&H has envisaged an ambitious highway development programme Bharatmala Pariyojana which includes development of about 65,000 km NHs. Under Phase-I of Bharatmala Pariyojana, the MoRT&H has approved implementation of 34,800 km of NHs in 5 years (2017-18 to 2021-22) with an outlay of Rs 535,000 crores. The NHAI has been mandated development of about 27,500 km of NHs under Bharatmal Pariyojna Phase-I.

The programme focuses on optimizing efficiency 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 Efficiency Improvement, Border and International Connectivity roads, Coastal and Port Connectivity roads and Green-field expressways. Multi-modal integration is also built into this program. Projects with aggregate length of approximately 13,171 kms were already been awarded under Bharatmala Pariyojana (including residual NHDP Works) till November 2020, while projects with length 2,587 kms were under bidding. Additionally, work on preparation of Detailed Project Reports for about 13,233 kms was under progress.

Details of NH length constructed per day during last seven years and 2020-21:

Year Length in Km Pace (Km per day)
FY 2014-15 4,410 12.08
FY 2015-16 6,061 16.56
FY 2016-17 8,231 22.55
FY 2017-18 9,829 26.93
FY 2018-19 10,855 29.74
FY 2019-20 10,237 27.97
FY 2020-21 13,298 36.43

The pace of highways construction in the country has touched a record ~37 km per day in FY 2020-21. Despite COVID-19 impact, the annual project award has by the Ministry increased by 38% in past three years from 5,494 kms in FY 2018-19 to 10,467 kms in FY 2020-21. The

Cumulative cost of ongoing project works has increased by 54% at the end of FY 2021 compared to FY 2020. Projects having length of ~64000 kms and more than 2100 projects are ongoing in FY 2020-21. There is continuous upward momentum in road construction having CAGR of 20% plus. In FY 2021 more than 13,000 kms of roads are constructed from 4,410 kms in FY 2015.

Despite the fact that construction came to a halt in April 2020 due to the lock-down on account of COVID-19 pandemic, NHAI set a new record by building 4,192 km of National Highways in FY 2020-21. This was about 5% higher than the construction in 2019-20 and 24% more than the level achieved in 2018-19. Continuing the same trend with the development of 4,192 km of National Highways during FY 2020-21, the NHAI has achieved an all-time high construction since its inception in 1995.

NHAI has awarded 141 projects with combined length of 4,788 km in 2020-21, the highest in the last three years, compared with 3,211 km in 2019-20 and 2,222 km in 2018-19. The capital cost of the projects awarded in FY 2020-21 amounted to Rs 171,226 crore, the highest ever, compared with Rs 81,324 crore in FY 2019-20 and

Rs 64,009 crore in FY 2018-19. In terms of lane kilometre, NHAI has constructed 18,500 lane km (50 lane km/day) during 2020-21, 40% more than in 2019-20 and 91% more than in 2018-19. Capital expenditure by NHAI for development of highway infrastructure reached an all-time high of Rs 128,000 crore during FY 2020-21, 23% higher compared to such spending in FY 2019-20.

FASTag implementation has also reduced the wait time at National Highway fee plazas significantly, resulting in enhanced user experience. In order to ensure that the payment of fees at Toll Plazas is through Electronic means only and vehicles pass seamlessly through the Fee Plazas, the FASTag drive has been very well supported by the highway users as it has achieved over 95% penetration with more than three crore users in the country. Many of the toll plazas have even reached about 99% penetration. Toll collection through FASTag has seen a consistent growth, crossing Rs 100 crore per day mark.

1.3 Growth Drivers

To accelerate the pace of construction, several initiatives have been taken to revive the stalled projects and expedite completion of new projects:

Identification of Model National Highway in the state for development by the Government.

Streamlining of land acquisition and acquisition of major portion of land prior to invitation of bids.

Award of projects after adequate project preparation in terms of land acquisition, clearances etc.

Disposal of cases in respect of Change of Scope

(CoS) and Extension of Time (EoT) in a time bound manner.

Procedure for approval of General Arrangement

Drawing for ROBs simplified and made online.

Close coordination with other Ministries and State Governments.

One time fund infusion

Regular review at various levels and identification/ removal of bottlenecks in project execution

Proposed exit for Equity Investors

Securitization of road sector loans

Disputes Resolution mechanism revamped to avoid delays in completion of projects.

As an integral part of Atmanirbhar Bharat, the various relief measures have been taken by the MoRTH for providing relief to Contractors/ Developers/Concessionaires of Road Sector from the impact of COVID, subsequent lockdown and other measures taken to prevent spread of COVID Mandatory Electronic toll collection through FASTag with effect from February 15, 2021.

For faster settlement of claims through conciliation and reduce liabilities, NHAI has rigourously started the process of conciliation by constituting three Conciliation Committees of Independent Experts (CCIE) of three members each.

In addition, there are a few more initiatives that will drive growth for the infrastructure sector in India:

Massive infrastructure push: Government of India has given a massive push to the infrastructure sector. The total budgetary outlay increased by 5.5 times, from Rs 33,414 crore in the financial year 2015 to Rs 183,101 crore for the financial year 2022.

NH expansion: In December 2020, the MoRTH proposed to develop additional 60,000 kms of National Highways (in the next five years), of which 2,500 kms are expressways/access controlled highways, 9,000 kms are economic corridors, 2,000 kms are coastal and port connectivity highways and 2,000 kms are border road/strategic highways. The ministry also intends to improve connectivity for 100 tourist destinations and construct bypasses for 45 towns/cities.

Growing demand: With the increase in consumer demand and nuclear families, need for two-wheelers and compact cars has been on the rise and is expected to grow even further. Roads traffic share of the total traffic in India has grown from 13.8% to 65% in freight traffic and from 32% to 90% in passenger traffic over FY 1951-2017.

Government initiatives: The Government of India has allocated 34.5% more than last year to infrastructure development, and given equal emphasis to all physical infrastructure including roads and highways, railways, urban infrastructure, power, port, shipping and airways, and petroleum and natural gas.

Increasing budget allocations: The Union Budget has given much-needed impetus to infrastructure development which could reduce trade and transaction costs and improve factor productivity. Moreover, the focus on roads and railways will create a unified market in India for seamless movement of goods and human resources.

Increasing investments: With the Government permitting 100% Foreign Direct Investment (FDI) in the road sector, several foreign companies has formed partnerships with Indian players to capitalise on the sectors growth.

1.4 Opportunities

Here are some trends that are ensuring seamless travel, better infrastructure and connectivity:

Electronic toll collection: National Electronic Toll Collection (FASTag) programme, the flagship initiative of MoRT&H and NHAI has been implemented on pan India basis in order to remove bottlenecks and ensure seamless movement of traffic and collection of user fee as per the notified rates, using passive Radio Frequency Identification (RFID) technology which is made compulsory with effect from February 15, 2021.

Different models: The type of Public-Private Partnership (PPP) models used in road projects are Build Operate Transfer (BOT) toll, TOT and HAM (Hybrid Annuity Model). The government has already started developing new, flexible policies to create investor-friendly highway development initiatives by monetising highway assets under TOT mode. The next fiscal year is likely to witness an increase in the award of contracts under the TOT and HAM model.

FDI in roads: Cumulative FDI in construction development (includes Townships, housing, built-up infrastructure and construction-development projects) stood at US$ 25.93 billion between April 2000 and September 2020. The Governments move to cut GST rates on construction equipment from 28% to 18% is expected to give boost to the industry.

National Infrastructure Pipeline: The final report of NIP Task Force has projected total infrastructure investment of Rs111 lakh crore during the period FY 2020-25. The sectors such as energy (24 per cent), roads (18 per cent), urban (17 per cent) and railways (12 per cent) amount to around 71 per cent of the projected infrastructure investments in India.

Atamnirbhar Bharat: Relief for Contractors / Developers of Road Sector: As an integral part of Atmanirbhar Bharat, the various measures have been taken by the MoRTH for providing relief to Contractors/ Developers/Concessionaires of Road Sector from the impact of COVID, subsequent lockdown and other measures taken to prevent spread of COVID.

Other favourable policies: These include 100% exit policy for stressed BOT players, providing secured status for PPP projects while lending, and proposal to scrap slow-moving highway projects, among others.

1.5 2021-22 budget highlights

The Government has given a massive push to the infrastructure sector by allocating Rs 233,083 crores (US$ 32.02 Billion) for the transport infrastructure.

The Government has allocated Rs 118,101 crore (US$ 16.20 Billion) to the Ministry of Road Transport and Highways.

The government expanded the ‘National

Infrastructure Pipeline (NIP) to 7,400 projects. ~217 projects worth Rs 1.10 lakh crore (US$ 15.09 billion) were completed as of 2020.

The government has launched Performance

Linked Incentive (PLI) to create manufacturing global champions across 13 sectors with amount committed nearly Rs 1.97 lakh crore in next 5 years starting FY 2021-22.

An accelerated development of highways to include development of 2,500 Km access control highways, 9,000 Km of economic corridors, 2,000 Km of coastal and land port roads and 2,000 Km of strategic highways.

The Delhi-Mumbai Expressway and two other packages will be completed by 2023. Construction of Chennai-Bengaluru Expressway will also begin.

NHAI to raise Rs 1 lakh crore through monetisation of highways under toll operate transfer (TOT) mode in the next five years

1.6 Bharatmala Pariyojana: Phase-I

This is the umbrella programme for the highways sector unrolled in FY 2017-18. The programme that aims to optimise the efficiency of road traffic movement across the country by bridging critical infrastructure gaps. The MoRT&H has done a detailed review of NH network with a view to develop the road connectivity to Border areas, and Coastal roads including road connectivity for Non-Major ports, improvement in the efficiency of National Corridors, development of Economic Corridors, Inter Corridors and Feeder Routes along with integration with Sagarmala, etc., under Bharatmala Pariyojana.

The Bharatmala Pariyojana envisages development of about 26,000 km length of Economic Corridors, which along with GQ and North-South and East-West (NS-EW) Corridors are expected to carry majority of the Freight Traffic on roads. Further, about 8,000 km of Inter Corridors and about 7,500 km of Feeder Routes have been identified for improving effectiveness of Economic Corridors, GQ and NS-EW Corridors. The programme envisages development of Ring Roads / bypasses and elevated corridors to decongest the traffic passing through cities and enhances logistic efficiency; 28 cities have been identified for Ring Roads; 125 choke points and 66 congestion points have been identified for their improvements. Further, to reduce congestion on proposed Corridors, enhance logistic efficiency and reduce logistics costs of freight movements, 35 locations have been identified for development of Multimodal Logistics Parks.

The Bharatmala (approved for estimated cost of

Rs 692,324 crores including other ongoing schemes) is to be funded from Cess (Rs 237,024 crores) collected form Petrol & Diesel (as per Central Road & Infrastructure Fund Act, 2000, erstwhile CRF Act, 2000), amount collected from toll (Rs 46,048 crores) apart from additional budgetary support (Rs 59,973 crores), expected monetisation of NHs through TOT Rs ( 34,000 crores), Internal & Extra Budgetary Resources (IEBR) (Rs 209,279 crores ) and Private Sector Investment (Rs 106,000 crores) as per the Financing Plan upto 2021-22.

Development of Phase-I of Bharatmala Pariyojana

Sr. No. Scheme Length (km) Cost (Rs crores)
1 Economic Corridors 9,000 120,000
2 Inter-Corridors & feeder roads 6,000 80,000
3 National Corridor Efficiency improvement Programme 5,000 100,000
4 Border & International connectivity roads 2,000 25,000
5 Coastal & port connectivity roads 2,000 20,000
6 Expressways 800 40,000
Sub Total 24,800 385,000
7 Ongoing Projects, including NHDP 10,000 150,000
Total 34,800 535,000

Outlook

The roads and highways sector is expected to take a mighty blow from the nationwide lockdown to contain the Covid-19 pandemic. This has pushed back a much-anticipated economic recovery this fiscal by bringing to a standstill. The Union Minister for Road Transport

& Highways and MSMEs, Shri Nitin Gadkari, in his communication dated May 7, 2020, has set a target of constructing roads worth Rs 15 lakh crores in the next two years.

Furthermore, there are tremendous opportunities in the near and long-term for the infrastructure space in India. The Governments ambitious infrastructure development programmes provide significant opportunities for investors and market players to help transform the sector and partner Indias socio-economic progress. Robust demand, higher investments, attractive opportunities and policy support changed the face of the road sector in the country within three years. The Government is implementing various projects across the length and breadth of the country to solve woes of the common man. The MoRT&H has introduced notable trends that will make India take lead position in road infrastructure in the near future.

Trust Overview

IRB InvIT is the Trust settled by its Sponsor, IRB Infrastructure Developers Ltd. and is registered under the SEBI (Infrastructure Investment Trusts) Regulations, 2014. It comprises of seven operational road projects having length of 4,055 lane km with four of the road projects forming part of Golden quadrilateral and one forming part of east-west corridor. It has presence across six states in India with average residual concession period of ~16 years.

The Sponsor of the Trust i.e. IRB Infrastructure Developers Ltd., is one of the largest infrastructure development and construction companies in India in terms of net worth in roads and highways sector. The Sponsor has been listed on the Stock Exchanges since 2008. As of March 31, 2021, the Sponsor has 23 road projects, under various stages of development and operations.

Consequent to the formation transactions, on May 9, 2017, the Trust acquired an initial portfolio comprising the six Project special purpose vehicles (SPVs), all of which were wholly owned by the Sponsor and its subsidiaries. On September 28, 2017, the Trust further acquired its seventh project ‘Pathankot Amritsar on NH 15 in Punjab from the Sponsor and its subsidiary.

Distribution

The InvIT regulations require the Trust to distribute minimum 90% of the cash flow, once in half year. The InvIT Regulations provide that not less than 90% of net distributable cash flows of each project SPV are required to be distributed to the Trust in proportion to its holding in each of the project SPVs, subject to applicable provisions of the Companies Act, 2013. Further, not less than 90% of net distributable cash flows of the Trust shall be distributed to the unitholders. Such distributions shall be declared and made not less than once in every six months in every financial year and shall be made not later than fifteen days from the date of such declaration.

For FY 2020-21, the Net Distributable Cash Flow (NDCF) of the Trust was Rs 534.60 crores , out of which the Trust has distributed 92%. The Total pay-out from the NDCF for FY 2020-21 was Rs 8.50 per unit to the unitholders.

Statement of Net distributable cash flows (NDCFs) of IRB InvIT

(Rs in Lakhs)
Sr. Particulars No. Year ended 31st March 2021 Year ended 31st March 2020
1 Cash flows received from Project SPVs in the form of interest 2 Cash flows received from Project SPVs in the form of dividend 44,391.68 59,426.29
3 Any other income accruing at the Trust level and not captured above, including but not limited to interest/return on surplus cash invested by the Trust 338.99 628.16
4 Cash flows received from the project SPVs towards the repayment of the debt issued to the Project SPVs by the Trust 22,393.89 18,054.58
5 Total cash inflow at the Trust level (A) 67,124.56 78,109.03
Less:
6 Any payment of fees, interest and expense incurred at the Trust level, including but not limited to the fees of the Investment Manager (9,355.06) (13,949.35)
7 Income tax (if applicable) at the Standalone Trust Level
8 Repayment of external debt (4,309.46) (3,478.35)
9 Total cash outflows / retention at the Trust level (B) (13,664.52) (17,427.70)
10 Net Distributable Cash Flows (C) = (A+B) 53,460.04 60,681.33

Factors affecting Operations

The business of Project SPVs prospects and results of operations and financial condition are affected by a number of factors including the following key factors:

Terms of the Concession Agreements for tariff revision

Toll fees are pre-determined by the relevant government entities and cannot be modified to reflect the prevailing circumstances other than the annual adjustments to account for inflation as specified in the Concession Agreements.

For the current seven projects, the tariff revision structure and details of the last revision are as follows:

Co. Name Tariff rate revision Revision date FY 2020-21 (%)
IRB Surat Dahisar Tollway Limited (IRBSD) Linked to WPI* (as an average for preceding year) September 1, every year 1.67
IDAA Infrastructure Limited (IDAA) Linked to WPI July 1, every year 0.42
M.V.R. Infrastructure & Tollways Limited (MVR) Linked to WPI September 1, every year 0.42
IRB Jaipur Deoli Tollway Limited (IRBJD) 3% + 40% of WPI April 1, every year 4.10
IRB Tumkur Chitradurga Tollway Limited (IRBTC) 3% + 40% of WPI April 1, every year 4.10
IRB Talegaon Amravati Tollway Limited (IRBTA) 3% + 40% of WPI April 1, every year 4.10
IRB Pathankot Amritsar Toll Road Limited (IRBPA) 3% + 40% of WPI April 1, every year 4.10

*Wholesale price index

Growth in Traffic Volumes

The Trusts target portfolio revenue of CAGR of 9.5-10% can be achieved with tariff revision of 4.5-5% combined with traffic growth of 5-5.5%. Going by historical performance, the intrinsic potential as well as current performance of the projects owned by the Trust, it is envisaged that the Trust will achieve its targets.

Operating and Maintenance cost

The Concession Agreement spells out significant costs during the concession period including operating and maintenance expenses, such as periodic maintenance required to be performed. Periodic maintenance involves repair of wear and tear of roads, including overlaying the surface of the roads, if required.

The O&M of seven Project SPVs is managed by the IRB Infrastructure Developers Limited, (Sponsor and Project Manager), as per the fixed price agreements/contracts executed by respective Project SPVs. The O&M cost covers routine and periodic maintenance, details for FY 2020-21 and FY 2019-20 are as follows:

Maintenance Maintenance
Project Name Cost (Rs in Lakhs) Cost (Rs in Lakhs)
FY 2020-21 FY 2019-20
IDAA 4,030 5,434
IRBSD 3,754 6,307
IRBJD 5,293 4,522
IRBTA 1,101 1,499
IRBTC 1,168 3,013
MVR 433 1,757
IRBPA 4,929 4,336
Total 20,708 26,868

Regulatory Commitments

As per the Concession Agreements, some of the Project SPVs are required to pay revenue share/premium to the NHAI.

Tumkur – Chitradurga is obligated to pay fixed amount of premium to NHAI. As per the deferred premium agreement, in the case of Tumkur – Chitradurga project, part of the premium obligation is shown as premium deferment and balance amount is paid to NHAI during the year.

In case of the Surat – Dahisar project, revenue share is paid to the NHAI which was 49% till February 19, 2021 and 50% w.e.f from February 20, 2021 and is set to increase by 1% every year.

In case of Omalur – Salem project, revenue share is paid to the NHAI at a fixed rate per annum which is 22.50%

Interest Rates Scenario:

Interest rates impact both growth and inflation. Higher the interest rate, higher is the cost of capital. This reflects on the slowdown of investments in the economy. Interest rate is a significant factor affecting any new acquisition of asset. Banks and financial institutions provide the debt under floating or fixed rate depending on the asset class, Cash flow generation and the credit rating of the borrower.

The new acquisition of Pathankot- Amritsar project was funded through 100% debt from a bank at a floating rate of interest with annual reset. The interest rates are linked to Marginal Cost of Funds Based Lending Rate (MCLR) of the bank with a spread margin of 30 basis points. It is perceived that any change in the interest rate on the reset date would affect the cash flows of the Fund. However rising interest rate will have a direct impact on inflation that in turn results in higher tariff revision for the projects, thus mitigating the risk of higher interest rate on cash flows of the Fund.

General economic conditions in India -- level of investment and activity in infrastructure development sector

The central and state governments have renewed their focus on infrastructure that is evident from the fact that the budgetary allocations for construction and augmentation of roads and highways in India have increased significantly. This increased budgetary allocation, when complemented by the private sector participation would generally result in large infrastructure projects in India.

Innovative bidding structures like HAM and TOT provide scopes for increase in portfolios of highway developers. This would provide huge scope for future acquisitions for the Trust and thereby enhance stakeholders value.

Financial Review

Internal accruals are robust even after considering all expenses, taxes and repayment of debt.

The total consolidated income for FY 2020-21 has decreased to Rs 1,161 crores from Rs 1,270 crores in FY 2019-20.

The consolidated toll revenues for FY 2020-21 has decreased to Rs 1,103 crores from Rs 1,236 crores for FY 2019-20 due to lock down imposed in various states because of the pandemic.

EBITDA for FY 2020-21 stood at Rs 934 crores from Rs 1,022 crores in FY 2019-20.

Interest costs (including interest on premium deferment) for FY 2020- 21 stood at Rs 145 crores as against Rs 164 crores for FY 2019-20.

Depreciation for FY 2020-21 decreased to Rs 608 crores from Rs 685 crores in FY 2019-20.

Profit after tax for year ended March, 2021 increased to Rs 181 crores from Rs 173 crores in March, 2020.

Critical Accounting Policies:

The preparation of financial statements in conformity with applicable accounting standards and the Companies Act, 2013 requires the Trust management to make judgements, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the results of operations at the end of the reporting period. By their nature, these judgements are subject to a degree of uncertainty. Although these estimates are based upon the best knowledge of the Trusts management of current events and actions, the actual results could differ from these estimates.

While all aspects of the financial statements should be read and understood in assessing their current and expected financial condition and results, the Trust believes that the following critical accounting policies warrant particular attention:

Intangible assets Toll Collection Rights:

Toll collection rights are stated at cost net of accumulated amortisation and impairment losses.

Cost includes:

Toll collection rights awarded by the grantor against construction service rendered by the Project SPV on Design, Build, Finance, Operate, Transfer (DBFOT) basis, which consists of direct and indirect expenses on construction of roads, bridges, culverts, infrastructure and other assets at the toll plazas.

Toll collection rights are amortised over the period of concession, using revenue-based amortisation as per exemption provided in Indian Accounting Standard (Ind AS) 101. Under this method, the carrying value of the rights is amortised in the proportion of actual toll revenue for the year to projected revenue for the balance toll period, to reflect the pattern in which the economic benefits of the assets will be used. At each balance sheet date, the projected revenue for the balance toll period is reviewed by the management. If there is any change in the projected revenue from previous estimates, the amortisation of toll collection rights is changed prospectively to reflect any variations in the estimates.

Gains or losses arising from de-recognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in the statement of profit or loss when the asset is derecognised.

Intangible assets are assessed for impairment whenever there is an indication that the intangible asset may be impaired.

Premium Obligation

As per the service concession agreement, some of the SPVs are obligated to pay the annual fixed amount of premium to NHAI. This premium obligation has been capitalised as an intangible asset since it is paid towards getting the right to earn revenue by constructing and operating the roads during the concession period. Hence, total premium payable as per the service concession agreement is upfront, capitalised at fair value of the obligation at the date of transition.

Besides, gains or losses arising from de-recognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset of the Trust and are recognised in the statement of profit or loss when the asset is derecognised.

Intangible assets are assessed for impairment whenever there is an indication that the intangible asset may be impaired.

Amortisation

Toll collection rights are amortised over the period of concession, using revenue-based amortisation as per exemption provided in Ind AS 101. Under this method, the carrying value of the rights is amortised in the proportion of actual toll revenue for the year to projected revenue for the balance toll period, to reflect the pattern in which the assets economic benefits will be consumed. At each balance sheet date, the projected revenue for the balance toll period is reviewed by the Trust. If there is any change in the projected revenue from previous estimates, the amortisation of toll collection rights is changed prospectively to reflect any changes in the estimates.

Premium deferment

The balance sheet of the Trust reflects premium deferral (i.e. premium payable less paid after adjusting premium deferment) as aggregated under premium deferred obligation. Interest payable on the above is aggregated under premium deferral obligation. Interest on premium deferral is capitalised during the construction period and thereafter charged to the statement of profit and loss.

Provisions

Generally, provisions are recognised when the Fund has a present obligation (legal or constructive) as a result of a past event. It is probable that an outflow of resources of economic benefits will be required to settle the obligation and a reliable estimate can be made of the obligation amount. When the Fund expects some or the entire provision to be reimbursed, for example, under an insurance contract, the reimbursement is recognised as a separate asset, but only when the reimbursement is virtually certain. The expense relating to a provision is presented in the Statement of Profit and Loss, net of any reimbursement.

Provisions are discounted using a current pre-tax rate that reflects, when appropriate, the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.

Principal Components in the consolidated profit and loss Income items

The Project SPVs income consists of revenue from operations and other income. Revenue from operations primarily consists of income from toll collection. Further, during the construction period of a project, the NHAI may ask the Project SPVs to carry out utility shifting work (which is incidental to the construction of the toll road and typically involves the shifting of utilities that are located at the construction site) or may award the Project SPVs additional scope of work that is separately paid by the NHAI. Revenue from such utility shifting or change in scope contract and the sale of materials, among others, also forms part of the Project SPVs operating revenue. However, this is not significant as compared to toll revenue.

The term Other income includes interest income on bank deposits, interest on an income tax refund, interest unwinding on loan given, dividend income, gains on sale of property, plant and equipment, gain on sale of investments and certain miscellaneous income. Other income also includes any gain on sale of investments and fixed assets.

Expense items

Expenses are made up of: (i) road work and site expenses,(ii) employee benefits expense and (iii) depreciation and amortisation expenses, (iv) finance cost, and (v) other expenses.

Road work and site expenses

This expenditure includes contract expenses relating to utility shifting or change in scope contracts, operation and maintenance expenses, road works expenses, cost of material sold, independent engineer fees, subcontracting and security expenses, and site and other direct expenses.

Employee benefits expenses

This nomenclature includes salaries, wages and bonus paid to the Trust employees, contribution towards provident fund and other funds, gratuity expenses and staff welfare expenses.

Depreciation and amortization

Depreciation and amortisation account shows depreciation on property, plant and equipment and amortisation of intangible assets of the Trust.

Finance costs

Finance costs of the Trust include interest on loans from banks/financial institutions, interest loss on derivative contracts, interest on premium deferment, interest on loan from group companies, other borrowing costs, interest unwinding on loan taken and interest unwinding on premium obligations.

Other expenses

The day to day working of the Trust involves a number of administrative expenses which are listed as Other expenses. These include various administrative costs such as power and fuel costs, rent, rates and taxes, water charges, repairs and maintenance, travel and conveyance expenses, vehicle expenses, printing and stationery expenses, director sitting fees, advertisement expenses, legal and professional expenses, payments to the SPVs auditor, bank charges, insurance and other miscellaneous expenses.

2. Human Resource

At IRB InvIT, the focus on human resource development is a continuous process and is demonstrated through various employee engagement initiatives and regular talent management reviews. The key highlights for last year were preparation and implementation of detailed careerpathforhighpotentialemployees,fillingvacancies through internal talent resourcing, skip level meetings across organisation for creating a transparent working environment. We have also undertaken an initiative to optimise the manpower cost for better productivity and improved accountability thereby creating a performance orientated career model amongst all its members.

3. Risk Management

The opportunity in the business of toll collection is the upbeat traffic movement which would help in improving the toll collection and thereby increase the return to the unit holders. Having said that, the biggest risk that the projects face is the slowdown in traffic and diversion of traffic. To overcome such risk, we have enough safeguards in the concession agreement with NHAI wherein our losses would be either cash reimbursed, or we would be provided an extension of time in our concession period.

4. Internal control and systems

IRB InvIT has a strong 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 audits 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.

5. Cautionary Statement

The terms ‘IRB InvIT, and ‘the Trust are interchangeably used and mean IRB InvIT and its Project SPVs as may be applicable.

This annual report contains certain forward-looking statements and may contain certain projections. These forward-looking statements generally can be identified by words or phrases such as ‘aim, ‘anticipate, ‘believe, ‘expect, ‘estimate, ‘intend, ‘objective, ‘plan, project, ‘will, ‘will continue, ‘will pursue, ‘seek to or other words or phrases of similar import. Similarly, statements that describe strategies, objectives, plans or goals are also forward-looking statements.

All forward-looking statements and projections are subject to risks, uncertainties and assumptions. Actual results may differ materially from those suggested by forward-looking statements or projections due to risks or uncertainties associated without expectations with respect to, but not limited to, regulatory changes pertaining to the infrastructure sector in India and the Trusts ability to respond to them, the Trusts ability to successfully implement its strategy and objectives, the Trusts growth and expansion plans, technological changes, the Trusts exposure to market risks, general economic and political conditions in India that have an impact on the Trusts business activities or investments, the monetary and fiscal policies of India, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices, the performance of the financial markets in India and globally, changes in domestic laws, regulations and taxes and changes in competition in the infrastructure sector. Certain important factors that could cause the Trusts actual results to differ materially from expectations include, but are not limited to, the following:

• the business and investment strategy of the Trust; expiry or termination of the Project SPVs respective concession agreements;

• future earnings, cash flow and liquidity; potential growth opportunities; financing plans; the competitive position and the effects of competition on the Trusts investments;

• the general transportation industry environment and traffic growth; and

regulatory changes and future Government policy relating to the transportation industry in India.

By their nature, certain market risk disclosures are only estimates and could be materially different from what actually occurs in the future. As a result, actual gains or losses could materially differ from those that have been estimated. Forward-looking statements and projections reflect current views as of the date hereof and are not a guarantee of future performance or returns to investors. These statements and projections are based on certain beliefs and assumptions that in turn are based on currently available information.

Although the investment manager believes that the assumptions upon which these forward-looking statements and projections are based are reasonable, any of these assumptions could prove to be inaccurate, and the forward-looking statements and projections based on these assumptions could be incorrect. None of the Trust, the trustee, the investment manager and their respective affiliates/advisors have any obligation to update or otherwise revise any statements reflecting circumstances arising after the date hereof or to reflect the occurrence of underlying events, even if the underlying assumptions do not come to fruition.

There can be no assurance that the expectations reflected in the forward-looking statements and projections will prove to be correct. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements and projections and not to regard such statements to be a guarantee or assurance of the Trusts future performance or returns to investors.