Shrem InvIT Management Discussions

<dhhead>Management Discussion and Analysis</dhhead>

Global macroeconomic review

The reported year observed the global economy navigating complex challenges, such as geopolitical tensions, fluctuating commodity prices and elevated inflationary pressures. While the macroeconomic challenges affected both advanced and emerging markets, the global economy, overall, demonstrated remarkable resilience, achieving a growth rate of 3.2% in CY2023.1 To combat escalating inflation, central banks in major economies implemented measured interest rate hikes. This, further, fostered gradual economic expansion and bolstered employment opportunities.

In the infrastructure sector, road infrastructure, in particular, witnessed significant growth. Governments worldwide invested heavily in upgrading and expanding their road networks, driven by the need to enhance connectivity, reduce congestion and improve overall transportation efficiency. This led to a surge in demand for construction materials, equipment and services, thereby boosting the sector’s performance. Notably, the Asia-Pacific region emerged as a key driver of this growth, with countries like China, India and Indonesia undertaking large-scale infrastructure projects to support their rapidly urbanising populations.

Indian macroeconomic review

The Indian economy has demonstrated remarkable resilience amid various global challenges. In FY2024, India maintained its position as one of the world’s fastest-growing major economies, supported by strong domestic demand, healthy agricultural output, robust policy framework, strategic initiatives, and a gradual increase in private capital expenditure. The Reserve Bank of India (RBI) effectively managed monetary policies to control the inflation rate in support of economic growth. India’s real GDP expanded by 8.2% in the financial year 2023-24.³

Efforts to streamline supply chains and increased government expenditure shielded India from significant economic disruptions. Further, with the decline in inflation rates and heightened credit demand, an atmosphere of economic optimism prevails.

Outlook

Looking ahead, strong fundamentals such as political stability, heightened government focus on public capital expenditure, a gradual rise in private capital expenditure and growing credit demand, are expected to drive India’s growth. Further, robust banking and financial services sector are expected to strengthen the nation’s growth trajectory.

This sustained growth trajectory is expected to propel India closer to the $7 trillion mark, making it the third-largest economy in the world by 2031. The government’s continued focus on infrastructure development, digitalisation and economic reforms, coupled with India emerging as a preferred manufacturing hub, is expected to drive productivity gains and support long-term growth.

Industry overview

India’s infrastructure sector

India’s infrastructure sector is poised for significant growth, driven by substantial government investments and strategic initiatives aimed at enhancing the country’s economic framework. In the financial year 2023-24, the government allocated 3.3% of GDP to infrastructure, with a notable emphasis on transport and logistics.⁷ Major projects include the development of a 2 lakh-km national highway network by 2025, the expansion of airports to 220 and the operationalisation of 23 waterways by 2030.⁸ The National Infrastructure Pipeline (NIP) envisions an investment of INR 111 lakh crore from 2020 to 2025.⁹

Thetotalbudgetaryoutlayforinfrastructure-relatedministries increased from around INR 3.7 lakh crore in FY 2023 to INR 5 lakh crore in FY 2024, marking a significant rise in capital expenditure. This increase highlights the government’s focus on enhancing infrastructure across various sectors, including transport, logistics and urban development.¹⁰

The infrastructure sector is expected to grow at a CAGR of 9.57%, reaching a market size of $ 322.27 billion by 2029.¹¹ The government’s focus on sustainability and multimodal connectivity, exemplified by initiatives like the PM Gati Shakti National Master Plan, aims to improve infrastructure development and improve efficiency. Public- Private Partnerships (PPP) continue to play a crucial role, facilitating private sector engagement in projects spanning roads, railways, ports and airports.

The sector is set to benefit from increased foreign direct investment (FDI) and innovative financing mechanisms like Infrastructure Debt Funds (IDF). The continued emphasis on modernising transport infrastructure, coupled with strategic investments in renewable energy and urban development, positions India’s infrastructure sector as a key driver of economic growth and development in the coming years.

Road and highway infrastructure of India

India has the second-largest road network in the world, spanning over 66.71 lakh km, which includes national highways, state highways, district roads and rural roads. Although national highways constitute only about 2% of the total road network, it carries over 40% of the total traffic, emphasising their critical role in the country’s economic and social development.¹²

India’s National Highway network has seen impressive growth. The length of four-lane plus NHs, including high- speed corridors, has surged by over 250%, expanding from 18,371 km in March 2014 to a staggering 46,179 km currently. This focus on high-capacity roads is accompanied by a reduction in less than two-lane NHs. These have shrunk from 27,517 km in 2014 to just 14,870 km today, representing only 10% of the total NH network. Furthermore, the government has initiated projects on 21 brand new access-controlled corridors (including expressways) with over 3,336 km already under construction. To ensure optimal road conditions, a robust Maintenance and Repair (M&R) mechanism has also been established, assigning responsibility to specific agencies for each NH section.

The National Highways Authority of India (NHAI) and the Ministry of Road Transport and Highways (MoRTH) have played a pivotal role in expanding and modernising this network. Major initiatives like the Bharatmala Pariyojana aim to construct 34,800 kilometres of highways, including 27 greenfield corridors, to enhance connectivity and efficiency. The Hybrid Annuity Model (HAM) has been instrumental in balancing risks between public and private sectors, fostering significant investments and PPPs in the sector.¹⁴

HighwayconstructioninIndiahasbeenincreasingrapidly,with the average construction rate increasing from 12 kilometres per day in 2014 to approximately 28.3 kilometres per day in 2023.16 This rapid development is part of a broader strategy to improve national connectivity, reduce travel time and enhance economic activities. The government’s commitment is evident in the substantial budget allocations, with H 2.78 lakh crore earmarked for highways and road construction in the fiscal year 2023-24.¹⁷

Additionally, the Gati Shakti initiative aims to digitise and speed up the authorisation process, further accelerating project implementation. These efforts are expected to make India’s road infrastructure comparable to that of developed nations like the United States within the next five years.

Budget allocation for the Ministry of Road Transport and Highways (in J Crore)¹⁸

Budget allocation for the Ministry of Road Transport and Highways has significantly increased, reflecting the government’s prioritization of infrastructure development. From 2009-2014, the average annual budget was approximately H 25,872 Crore. This figure has skyrocketed to H 2,70,435 Crore in 2023-24, representing a staggering 940% increase.¹⁹

Toll Collection

India’s highway toll collection has witnessed a significant surge, reaching a new five-year high of H 648.09 billion in the financial year 2023-24. This impressive 34.9% year-on-year growth is attributed to an increase in both tolled roads and their users. The data reveals a steady rise over the past few years, with toll collection figures standing at H 251.54 billion in 2018-19 and progressively increasing to H 480.28 billion in 2022-23. The government anticipates a further boost in revenue with the planned shift towards satellite-based toll collection.²⁰

Robust regulatory discipline for InvITs

InvITs are primarily governed by the Securities and Exchange Board of India (SEBI) through InvIT Regulations. As per the provisions of the SEBI InvIT Regulations, the Trustee over-looks the activities of the InvIT and ensures the business of the InvIT is being carried out in line with the objectives and regulations. Further, InvITs are mandatorily required to be listed on recognized stock exchanges in India. As per the SEBI Regulations, InvIT should have in-termediaries such as a Registered Valuer and Statutory Auditors.

The regulatory framework of Shrem InvIT comprises of following regulatories and agencies:

Shrem InvIT

Shrem InvIT is engaged in the business of owning and operating completed road assets housed under specific SPVs which have signed concession agreements with various authorities. These assets having total length of 10,504 lane Kms are spread across nine states in India, including Madhya Pradesh, Maharashtra, Uttar Pradesh, Karnataka, Gujarat, Jharkhand, Andhra Pradesh, Odisha, and Chhattisgarh. The SPVs receive income either in the form of Annuity from the Concessioning Authority or Toll in the from the user of the roads or both.

Financial summary :

The Summary of financial information on Consolidated basis of the InvIT as on March 31, 2024, are as follows:

(Rs in Lakhs)

Particulars	FY 2024	FY 2023	For the period 16th Sept 21 to 31st March 22
Total Revenue	2,03,532.65	1,43,391.24	58,734.78
EBIDTA	1,68,699.13	1,11,380.64	45,542.90
EBIDTA %	82.89	77.68	77.54
PAT	1,05,146.39	48,686.65	29,863.70
NDCF*	75,137.73	57,029.20	29,162.18
DPU (Rs/Unit)	13.340	13.854	7.469
Net Debt / AUM	49.56%	46.12%	38.99%
NAV (As per fair value)	109.19	106.12	100.86

*The distribution made during the year comprises of distribution for the last quarter of previous financial year and excludes distribution for the last quarter of the current financial year in each of the financial year respectively.

Distributions during FY 24

			Distribution consists of
Sr. No.	Total amount of distributionper Unit(J)	Payment date of distribution	Dividend per Unit (J)	Interest per Unit (J) (Subject to applicable taxes)	Return of Capital per Unit (J)
1	2.700	May 15, 2023	1.1194	0.2493	1.3313
2	3.200	July 26, 2023	2.0600	1.1400	-
3	2.340	November 02, 2023	0.5500	0.5489	1.2411
4	5.100	Feburary 01, 2024	2.0000	2.2782	0.8218

Acquisitions and Divestments

During the year under review, Shrem InvIT completed the acquisition of four HAM projects and 49% stake in one HAM project from Dilip Buildcon Limited (DBL) and its affiliates under:

Sr. No.	Name of the Project	Project Authority	Shareholding in %	Status
1	DBL Chandikhole Bhadrak Highways Ltd.	NHAI	100	COD Achieved
2	DBL Bangalore Nidagatta Highways Pvt. Ltd.	NHAI	100	COD Achieved
3	DBL Nidagatta Mysore Highways Pvt. Ltd.	NHAI	100	COD Achieved
4	DBL Rewa Sidhi Highways Pvt. Ltd.	NHAI	100	COD Achieved
5	Pathrapali Kathgora Highways Pvt. Ltd.	NHAI	49	COD Achieved

Shrem InvIT also entered a binding documents with APCO Infratech Private Limited and Chetak Enterprises Limited for the acquisition of Five HAM road assets as detailed below . The transaction shall be completed upon completion of specified conditions including receiving requisite approvals from the lenders and NHAI.

Sr. No.	Name of the Project	Project Authority	Shareholding in %	Status
1	APCO Arasavalli Expressway Pvt. Ltd.	NHAI	100	COD Achieved
2	Freedompoint Expressway Pvt Ltd.	NHAI	100	COD Achieved
3	APCO Navkalyan Expressway Pvt Ltd	NHAI	100	COD Achieved
4	APCO Chetak Ultraway Pvt Ltd (DM-2)	NHAI	100	COD Achieved
5	APCO Chetak Expressway Pvt Ltd (DM-3)	NHAI	100	COD Achieved

During the year under review, Shrem InvIT, divested its stake in (i) Shrem Infraventure Private Limited, (ii) Shrem Roadways Private Limited and (iii) Shrem Tollway Private Limited, which were initially Holding Companies in the InvIT structure (‘Erstwhile Holdcos’). These companies were divested to the Sponsor.

Borrowings

Consolidated

Particulars	Opening Balance	Received during the year	Repaid during the year	Closing Balance
Secured Loan	6,09,950.95	1,74,556.43	42,771.21	7,41,736.17

*The closing balance does not match with books as closing balance in books is net off Unmortised Processing Fees on Term Loan.

Outlook

Over the last 3 years Shrem InvIt has built a very robust and stable portfolio of operational road assets, majority of them being HAM and Annuity assets which are generating regular cash flows. The relatively predictable nature of its revenue and fixed price inflation neutral O&M contracts with its O&M providers has ena-bled the Trust to deliver superior risk-adjusted total returns to its unitholders on a consistent basis.

On the operational front, the InvIT using industry leading technology tools and MIS systems has built adequate controls and processes to ensure its assets are maintained to the highest standards in compliance with the requirements of concession agreements. The InvIT will continue to make further investments to enhance operational efficiency and acheive superior asset management.

The InvIT backed by a strong sponsor is well capitalized and also has access to a requisite pool of capital to keep up the momentum of growing the underlying portfolio through new acquisitions and deliver enhanced returns to its unitholders.

Insurance

All Road Project assets of the Trust are covered under Industrial All Risk and Bharat Laghu Udyam Scheme (as against Standard Fire and Special Peril Insurance). This combination of insurance policies provides a wide cover against material damage due to perils such as fire and allied perils, accidental damages, breakdown for all assets, as well as business interruption for BOT(Toll) assets. Additionally, the electronic equipment (Advanced Traffic Management System, Toll Management System) are covered by appropriate Electronic Equipment Insurance which provides wide cover against perils as stated above and even theft. The coverage under these policies has been extended to include escalation, cost of architects, surveyors and consulting engineers, removal of debris, underinsurance waiver, etc.

All the Road Project assets are covered for an appropriate value in consonance with the current 100% replacement of the asset for material damage and currently projected toll collection for business interruption.

In addition to the above Shrem InvIT has taken insurance for terrorism cover for all Road Project assets with a loss limit of INR 300 Crores, non-damage business interruption with a loss limit of INR 5 Crores, and Commercial General Liability (CGL) with a loss limit of INR 25 Crores.

Summary of significant accounting policies

A summary of the significant 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 InvIT’s projections, estimates, expectations or predictions and those are forward looking statements within the meaning of applicable laws and regulations. Shrem InvIT 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.