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Driving to dividends

Increased infrastructure spending has led to the introduction of a new asset class in India, one that offers a double digit yield. Newton’s 1 Naomi Waistell outlines the story behind the country’s new investment trust.

The introduction of India’s first infrastructure investment trust, called IRB, in May underscores the expectation infrastructure spend will be a key driver of the country’s growth over the next few years.

Naomi Waistell, portfolio manager on Newton’s Emerging and Asian Equities team, says the IRB trust, which holds six toll roads, features a 10-12% yield and it is likely to be the first of many such listings. To put this in context, just 10% of the Indian market’s large cap stocks yield more than 3%, Waistell says.

The government has plans for some US$20bn infrastructure spend on roads but Waistell says trusts like IRB may benefit from more than just increased government spending. Toll road projects are likely to benefit from an additional government reform on tax.

“India has the world’s second largest road network, comprising 5.23 million kilometres. National highways are just 2% of the total road network and yet they carry some 40% of the traffic volume; some 60% freight is on roads. Clearly there is a need for more motorways so the sector should benefit from new projects, much of which will be privatised. At the moment India’s states have varying tax regimes so drivers paying at tolls do so manually, which leads to long queues,” Waistell says. “The government has proposed unified Goods and Services Tax, a harmonised system across India that could enable automation of toll collections, speeding up travel times. This in turn could see an increase in traffic growth and more toll income, supporting the dividend distributions from trusts like IRB,” she notes.

At Newton, four strategies have taken advantage of the spring IRB listing: Asian Income, Emerging Income, Multi-Asset Diversified Return and Multi-Asset Income. For Asian Income the IRB trust marks a new opportunity as the growth-orientation of the Indian market has meant there has been a dearth of investable income opportunities.

IRB is not a REIT, as they do not exist under Indian law, but is closer in nature to the UK’s own closed-ended investment vehicles. It holds six road projects, which combined account for 3,645 kilometres of highway across five Indian states. Each owns, operates and maintains a toll road.2 All six projects are managed by IRB Infrastructure Developers. The projects are mature, says Waistell, with one expiring in 2021, although the others go out as far as 2035. “Other tolls will be injected in the trust as the projects mature in order to maintain the income stream,” she explains, adding “as investors, we vote on whether the new assets should be included so we can continue to monitor the attractiveness of the assets and the resulting dividend profile of the trust.”

The trust must distribute 90% of net distributable cash flow annually from the tolls, hence the high yield, Waistell explains. She goes on to note another key attraction – while there may be gearing within the individual underlying projects, the trust itself is not leveraged.

Waistell believes the IRB trust may be the first but won’t be the last in this space. “India’s infrastructure is clearly developmentally behind and the authorities have seen what China has achieved in this space as a result of investment-led growth.”

She notes that it is not just India’s road network that is being targeted by reforms and increased spend, aviation is another key area.

Waistell says that in 2016 there were some 150 million domestic flight journeys in India, compared to c900 million in the US and around 500 million in China. “Air travel may cost more but it takes around 1/6th the time. As such we expect to see the number of airports increase and they are likely to go private (as public-private partnerships). They could also use this new investment trust structure for asset raising. As more trusts come to market, investors’ understanding of this new asset class will improve and likely spur greater demand too.”

 

 

  1. 1 Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA or the BNY Mellon funds.
  2. 2 Economic Times: IRB InvIT Fund opens today; here’s what you need to know; 3 May 2017.

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