Cashing in on an infra boom
The InvIT (Infrastructure Investment Trust) has come a long way over the last 7 years and has pumped more than $10 billion into the infrastructure sector. There are approximately 21 InvITs operating, with 10 of them in the road sector. Capital Infra Trust is looking to enter the market as a road-focused platform.
“Sponsored by 15-year-old Gawar Construction Limited, Capital Infra Trust will have a sizeable portfolio of stable, revenue-generating assets with no construction risk and long-term cash flows,” says Manish Satnaliwala, CEO of Capital Infra Trust.
Gawar Construction has developed expertise in the construction of road and highway projects across 19 states in India for various government and semi-government bodies, as well as statutory authorities, including the NHAI, the Ministry of Road Transport & Highways (MoRTH), the Mumbai Metropolitan Regional Development Authority (MMRDA), and the Central Public Works Department (CPWD). Since 2008, the InvIT sponsor has undertaken more than 100 road construction projects. As of the date of the Draft Offer Document, the Sponsor has a portfolio of 26 road projects on a Hybrid Annuity Model (HAM)
with the NHAI, of which 11 are completed projects, including three acquired assets, and 15 under-construction projects, which include two acquired assets.
Capital Infra Trust is intended to initially acquire, manage, and invest in the nine completed and revenue-generating initial portfolio assets, aggregating to approximately 683,875 km, operated and maintained pursuant to concessions granted by the NHAI and owned and operated by the Project SPVs. These roads are located in the states of Haryana, Rajasthan, Bihar, Uttarakhand, Himachal Pradesh, Madhya Pradesh, and Karnataka. In addition to the Initial Portfolio Assets, the Trust, through the Investment Manager, will also have the right to acquire new projects through a right of first offer with the Sponsor in accordance with the Right of First Offer (ROFO) Agreement.
“Since all Initial Portfolio Assets are on a HAM basis, our entire revenue is expected to continue in the future from interest income on financial assets receivable from the NHAI, revenue from operations, maintenance of roads, construction services, and operating revenues from the NHAI,” says Satnaliwala, who has previously worked in InvITs, namely OIT Infrastructure Management Limited (Oriental Infra Trust) and Roadstar Investment Managers Limited (ILFS InvIT), in various capacities.
In a HAM project, the concessioning authority shares a portion of the total project cost during the construction phase. As a mix of EPC and annuity models, HAM reduces the financial burden on a concessionaire during the project construction phase and provides assured revenue in the form of fixed predetermined annuities, interest on the reducing balance of completion cost (BCC), and O&M payments linked to inflation in the operational phase. Annuity payments eliminate the risk of income fluctuations resulting from changes in traffic volume, he says, and explains: “All of our initial portfolio assets have been receiving regular semi-annual annuities from the NHAI since 6 January, 2021. The aggregate annuity received until 30 June, 2024, is Rs464.35 crore. The residual terms of the concession agreements range between 10.3 years to 14.01 years as of 30 June, 2024.”
“The roads and highways sectors play an important role in the overall economy of India,” says Rakesh Kumar, founder and executive director of Gawar Construction. Phase I of Bharatmala Pariyojana envisages the construction of about 24,800 km of highways under the following categories: National Corridor (North-South, East-West, and the Golden Quadrilateral), economic corridors, inter-corridor roads, feeder roads, international connectivity, border roads, coastal roads, port connectivity roads, and expressways. “We believe that the Government’s focus on infrastructure and sustained increases in budgetary allocations for the sector, as well as the development of comprehensive infrastructure policies, will be beneficial to our business in terms of bringing in more opportunities for the acquisition of assets,” adds Kumar.
Strong track record
“We intend to leverage the experience and expertise of our Sponsor to gain a competitive advantage within the road infrastructure industry,” says Satnaliwala. Drawing upon the depth of experience, Gawar Construction, the Sponsor, has established a strong track record of developing, operating, and managing large and complex road and highway projects.
“The InvIT will be managed by qualified personnel of the Investment Manager, who has a strong management team with extensive experience, in-depth understanding, and a proven track record of performance in the road and highways sector. The board of directors and key managerial personnel have a cumulative experience of more than 30 years in various sectors, including the road and highways sector, and bring expertise in the areas of infrastructure, fintech, finance and accounting, and regulatory compliance,” says Satnaliwala, who emphasises: “We believe this will be key to the execution of our growth strategies. Some of Gawar’s projects include the Kiratpur project, which connects Shimla and Mandi, significantly reducing travel time between the two cities; the Hardiya project, connecting Patna and Ranchi, providing substantial commercial and business benefits to both states; the Khajuwala project, which is strategically important, aiding the movement of the armed forces; and the Mumbai Metro Rail project, which is estimated to reduce traffic congestion in the metropolitan city.”
“We believe that with the execution capabilities of the sponsor, constructing a smoother and more uniform pavement surface would significantly reduce maintenance costs and time. Additionally, the independent engineers of the Initial Portfolio Assets have not highlighted any operation and maintenance flaws in the Initial Portfolio Assets in the past, and the maintenance activities have been largely undertaken in the ordinary course,” says Yogesh Mahajan, CEO of the Sponsor.
The NHAI hybrid annuity projects provide a natural hedge against the risk of adverse interest rate movements. In addition to the annuity payments due under the respective Concession Agreements during the operational period, the NHAI is required to pay interest on the reducing balance of the completion cost (equivalent to 60 per cent of the Bid Project Cost) throughout the operational period at the rate of 3 per cent above the RBI Bank Rate. “Accordingly, any increase in the interest payable on loans with floating interest rates by the Trust due to an increase in interest rates gets offset by the increased revenues as a result of the increase in interest on the reducing balance of the completion cost. This structure of the concession agreements effectively mitigates the interest rate risk to the Project SPVs and provides greater financial predictability and stability to the Trust investors,” says Amit Kumar, CFO of Capital Infra Trust.
Satnaliwala further states that the Trust’s total outstanding consolidated net debt, after full utilisation of the offer proceeds, will be within the regulatory requirement of 49 per cent of the value of the Initial Portfolio Assets upon completion of the Offer (net of cash and cash equivalents), as specified under the SEBI InvIT Regulations.
“We will seek to optimise our debt and equity mix in such a manner that the aggregate consolidated borrowings and deferred payments of the Trust, net of cash and cash equivalents, do not exceed 70 per cent of the value of the Initial Portfolio Assets at any time, subject to the approval of the unit holders and in accordance with the SEBI InvIT Regulations,” explains Satnaliwala.
Going to the market
Meanwhile, Capital Infra Trust is planning to go public, having filed its offer document with SEBI, intending to raise an aggregate amount of Rs1,600 crore via an issue of units to the public. The IPO comprises a fresh issue of units aggregating up to Rs1,200 crore and an offer for sale of up to Rs400 crore by Gawar Construction Limited. The issue will be made through the book-building process, wherein 75 per cent, excluding the strategic investor portion, will be available to institutional investors and 25 per cent to non-institutional investors. The net proceeds are proposed to be utilised towards providing loans to the project SPVs for repayment in part or in full of their respective outstanding loans and for general purposes. The Units are proposed to be listed on the NSE and BSE. The Sponsor will subscribe to a minimum of 15 per cent of the total post-issue unit capital of the InvIT in order to comply with the sponsor lock-in requirements. The Trustee and Investment Manager for the issue are Axis Trustee Services Limited and Gawar Investment Manager Private Limited, respectively.
Gawar Construction founder and promoter Rakesh Kumar, who is a first-generation entrepreneur, hails from Hisar. With a focus on execution and timely delivery, the company has achieved a top line of more than Rs7,000 crore as of 31 March, 2024. Gawar wants to focus primarily on the EPC business and will create assets that can be monetised through InvIT. “The focus of the InvIT will be only on NHAI Road Assets,” says Satnaliwala.