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The Project Special Purpose Vehicles (SPVs) financial years end on March 31 of each year. Accordingly, all references to a particular financial year are to the 12-month period ended March 31 for that respective year.
Pursuant to the Share Purchase Agreement(s) dated May 9, 2017, the IRB InvIT Fund ("the Trust") has acquired the six subsidiary companies (Project SPVs) (IRB Surat Dahisar Tollway Limited (IRBSD), IDAA Infrastructure Limited (IDAA), IRB Talegaon Amravati Tollway Limited (IRBTA), IRB Jaipur Deoli Tollway Limited (IRBJD), M.V.R. Infrastructure and Tollways Limited (MVR) and IRB Tumkur Chitradurga Tollway Limited (IRBTC)). Accordingly, the revenue and corresponding expenses in these companies have been included from May 09, 2017 to March 31, 2018 in the financial statements.
Pursuant to the Share Purchase Agreement dated September 28, 2017, the Fund has acquired the subsidiary company (Project SPV) IRB Pathankot Amritsar Toll Road Limited (IRBPA). Accordingly, the revenue and corresponding expenses of the Subsidiary has been included from September 28, 2017 to March 31, 2018 in the financial statements.
IRB InvIT Fund ("the Trust") is an infrastructure investment trust registered under the InvIT Regulations. It is operated and maintained with a portfolio of seven toll-road assets in the Indian states of Maharashtra, Gujarat, Rajasthan, Karnataka, Tamil Nadu and Punjab. These toll roads are operated and maintained pursuant to concessions granted by the NHAI. This is the first infrastructure investment trust focused on toll-road assets in India listed on both the Stock Exchanges.
The Sponsor of the Trust i.e. IRB Infrastructure Developers Limited, is one of the largest infrastructure development and construction companies in India in terms of net worth in the roads and highways sector. The Sponsor has been listed on the Stock Exchanges since 2008. As of March 31, 2018, the Sponsor has 17 road projects, under various stages of development and operations. Whenever the Sponsor intends to transfer its assets, the Trust has the option to acquire these assets.
Consequent to the Formation Transactions, on May 9, 2017, the Trust acquired an initial portfolio comprising the six Project 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 the state of Punjab from the Sponsor and its subsidiary. The project was acquired on the basis of favourable voting to the tune of over 83% of the votes cast by the unit-holders of the Trust.
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 the Trust shall be distributed to the Unitholders. Such distributions shall be declared and made not less than once every six months in every financial year and shall be made not later than fifteen days from the date of such declaration.
For FY 18, the Net Distributable Cash flow (NDCF) of the Trust was Rs 655 crores, out of which the Trust has distributed ~94%. The Total pay-out from the NDCF for FY 18 was Rs 10.55 per unit bringing it to 12.11% annualised cash yield to the unit holders. Despite the initial impact of Demonetisation and GST, the Trust has comfortably met the initial guidance of 12% yield and is slated to continue the same for FY 19 as well.
Statement of Net Distributable Cash Flows (NDCFs) of IRB InvIT Fund
|No.||March 31, 2018|
|(Amt. in Lakhs)|
|1||Cash flows received from Project SPVs in the form of Interest||51,122.81|
|2||Cash flows received from Project SPVs in the form of Dividend||-|
|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||446.14|
|4||Cash flows received from the project SPVs towards the repayment (Net) of the debt issued to the Project SPVs by the Trust||21,911.71|
|5||Total cash inflow at the Trust level (A)||73,480.66|
|6||Any payment of fees, interest and expense incurred at the Trust level, including but not limited to the fees of the Investment Manager||(7,546.97)|
|7||Income tax (if applicable) at the Standalone Trust Level||-|
|8||Repayment of external debt||(389.50)|
|9||Total cash outflows / retention at the Trust level (B)||(7,936.47)|
|10||Net Distributable Cash Flows (C) = (A+B)||65,544.19|
Factors affecting Operations
The business of Project Special Purpose Vehicle (SPVs), prospects, 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:
|Company Name||Tariff rate revision||Revision date||
FY 18 (%)
|IRB Surat Dahisar Tollway Limited (IRBSD)||Linked to WPI*||September 1st, every year||3.70|
|(as an average for preceding year)|
|IDAA Infrastructure Limited (IDAA)||Linked to WPI||July 1st, every year||6.24|
|M.V.R. Infrastructure & Tollways Limited||Linked to WPI||September 1st, every year||6.24|
|IRB Jaipur Deoli Tollway Limited (IRBJD)||3% + 40% of WPI||April 1st every year||4.36|
|IRB Tumkur Chitradurga Tollway Limited||3% + 40% of WPI||April 1st every year||4.36|
|IRB Talegaon Amravati Tollway Limited||3% + 40% of WPI||April 1st every year||4.36|
|IRB Pathankot Amritsar Toll Road Limited||3% + 40% of WPI||April 1st every year||4.36|
*Wholesale Price Index
Growth in Traffic Volumes
The other growth driver for the Toll Road assets is growth in Traffic volumes. Historically, these assets have witnessed double digit revenue CAGRs, however two back to back external developments impacted the traffic momentum adversely during
FY17 and FY18. In November 2016, Demonetisation was announced that kept the traffic growth slow even during Q1FY18. Just when the economy was almost recovering from the impact of Demonetisation, GST was implemented on a nationwide basis. While it was an excellent structural reform, it led to a temporary slowdown in commercial traffic for H1FY18 as new production and cargo movement was halted briefly. Meanwhile vendors and suppliers learnt and complied with GST norms. With the onset of Festive season as well as clarity on GST process and impact, Q3FY18 witnessed a robust pick up in traffic volumes and the trend continued in Q4FY18 as well. Further, we have seen that the traffic in IRBJD as well as IRBPA was impacted by sand mining ban. IRBJD and IRBPA are in the process of filing claim with NHAI against such losses under the relevant clause of the Concession Agreement.
On the whole, the Trusts target Portfolio revenue 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.
O & M 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 the 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 Modern Road Makers Pvt. Ltd., (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 FY18 are as follows:
(Rs in lakhs)
As per the Concession Agreements, some of the Project SPVs are required to pay revenue share/premium to the NHAI.
Tumkur Chitradurga and Omalur Salem projects are obligated to pay fixed amount of premium / negative grant to the NHAI. As per the supplementary agreement with NHAI, 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 at a fixed rate per annum which was 46% for FY18 set to increase by 1% every year.
Interest Rates Scenario
Interest rates impact both growth and inflation. Higher the interest rate, higher is the cost of capital, which 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 MCLR of the bank with a spread margin of 15 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 which results into 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 Government and State Governments have renewed their focus on the infrastructure, which 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 Hybrid Annuity Model (HAM) and Toll Operate Transfer (ToT) provide scope for increase in portfolios of highway developers, which in turn would provide huge scope for future acquisitions for the Trust and thereby enhance Stakeholders value.
The Trust plans to acquire toll/annuity road assets so as to expand its portfolio over the next several years from the Sponsor as well as other players in the industry. Pursuant to the agreement with the Sponsor, the Trust has potential to grow to 4 times its current size, viz. Rs 75 billion.
|Project Line-up on RoFR basis from Sponsor||in Mn|
|Project Name||Type||Project Cost||Potential to grow EV to over 5x (over Rs 390 bn) with the existing project pipeline of Sponsor on RoFR basis|
|IRB Ahmedabad Vadodara Super Express Tollway Pvt Ltd*||BOT||46,698|
|Solapur Yedeshi Tollway Private Limited||BOT||15,421|
|Kaithal Tollway Private Limited||BOT||23,475||Healthy mix of Projects available in terms of size, geography, residual life as well as operational visibility (5 projects on 4 to 6 laning and 3 projects on HAM basis)|
|Yedeshi Aurangabad Tollway Private Limited||BOT||31,770|
|AE Tollway Private Limited||BOT||25,350|
|IRB Westcoast Tollway Private Limited||BOT||26,390|
|Udaipur Tollway Private Limited||BOT||20,879|
|CG Tollway Private Limited||BOT||20,900||Availability of HAM projects to further strengthen the portfolio with stable Annuity cashflows from NHAI|
|Kishangarh Gulabpura Tollway Private Limited||BOT||15,260|
|IRB Hapur Morarabad Tollway Private Limited||BOT||34,000|
|VK1 Expressway Private Ltd.||HAM||20,430||- Multiple options to source debt at lowest cost, with SPVs being AAA rated|
|IRB PS Highway Private Ltd.||HAM||21,690|
|IRB PP Project Private Ltd.||HAM||12,960|
|Total||3,15,223||- To be cash yield accretive from day 1|
Further, the Trust can acquire Rs 45 Billion worth of assets, without diluting capital, through debt funding.
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 judgments, 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 judgments 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:
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 DBFOT basis - 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 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 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.
As per the service concession agreement, some of the SPVs are obligated to pay the annual fixed amount of premium to National Highway Authorities of India (NHAI). This premium obligation has been capitalized as 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 capitalized 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.
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.
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.
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 Statement of Profit and Loss
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, which 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.
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, sub-contracting and security expenses, and site and other direct expenses.
Employee benefits expenses
This nomenclature include salaries, wages and bonus paid to the Trust employees, contribution towards provident fund and other funds, gratuity expenses and sta3 welfare expenses.
Depreciation and amortisation
Depreciation and amortisation account shows depreciation on property, plant and equipment and amortisation of intangible assets of the Trust.
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.
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.
The terms "IRB InvIT Fund", and "the Trust" are interchangeably used and mean IRB InvIT Fund 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 di3er 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 the 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 which 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 di3er 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;
the competitive position and the e3ects 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 di3erent from what actually occurs in the future. As a result, actual gains or losses could materially di3er 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, which in turn are based on currently available information.
Although the Investment Manager believes 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.