Newsletter dated: 21-08-2021

 

"The only function of economic forecasting its to make astrology look respectable" -the late economist John Kenneth Galbraith

 

Road Ahead:

While predicting the next move of stock market is very difficult & futile exercise but positioning oneself as per his view (whether it plays out like that or not, one knows in hindsight) is extremely important. All these years we have tried to rationally build our views periodically and positioned our self in stock market accordingly. This has helped us in deciding when to go slow & fast in stock markets, which part of the stock markets we want to be in & whether it’s good to take profits & sit on cash or let it still be open. Mind you these are our personal views & stock market may not react the way we think.

Retail participation has been soaring while I write this & with many apps, youtubers & various other modes of communication it’s become very easy for anyone to identify, diagnose, analyze & understand various companies listed on stock exchanges and profit from it. Gradually in last one year markets have become so fast that no serious time is spent in this process & mostly a ‘buy’ report or a quarterly good results is extrapolated & stocks goes rocket. While the methods of stock analysis can change & process can be shorted & sharped the psyche of traders, investors, scalpers, operators and various participants cannot change easily, from years & years booms & bust have happened in similar fusion. Loose liquidity has always been one of the biggest factor in any cycles for propelling the stock markets, and everything follows it. Most important thing to now observe therefore is when this liquidity will reverse; and if it reverses what happens to Indian Stock Markets.

From feds own speech to bond yield to inflation everything is confusing and no clear signals as to when will this reverse are emanating. While stocks markets across the world have started discounting FY23 the fact is real economies are not doing good world over except US where the vaccination % is large and there too delta variant has generated some scare. In such a situation even though there might; be signals of bubbles in some asset classes, it shall become difficult for them to pull the plug. My view is it will be a back and forth approach & in no way there will be serious tapering in next 12 month.

In such situation, how to position oneself in Indian stock market. Clearly the stocks have run up a lot and more is visible if we see them from March’20 lows. Small caps in particular and Mid-caps segment of the market are overheated with just 52 week returns of 80 & 60 % and many individual stocks given 300/500 plus returns. A large part of the market is highly overvalued if not bubble and surly no time to onboard them, rather stay cautions here. However large caps in last 6 months are up only 8 % and therefore it seems to me that we are not in bubble, as far as whole market is concerned. The market cap of the large caps is more than 65/70% of the total stock market and if they are not in bubble, stock market is not done with its up cycle. Also while stock performances are discounting FY’23 expectations, a large part of real economy stocks like banks, auto & capital Goods are still not richly priced. Generally a stock market crash happens when markets become deaf to all negative news and all caps, large mid & small keep roaring, this does not seem to be the case currently. So according to us , while we may see connection ( highly likely )and it may be brutal in small and midcaps part of market, we are surely not done with the upcycle in equities.

Mutual Fund SIP RETURNS-

CATEGORY AVERAGE RETURNS-

KNOWLEDGE CENTER

InvITs-

Infrastructure Investment Trusts (InvITs) are infrastructure developer-sponsored Trusts that own, operate, and invest in under-construction infrastructure projects. These infrastructure assets can be roads and highways, power distribution networks, telecom towers, fiber optic networks, etc.

In many ways, an InvIT is similar to a Mutual Fund:

  • Both allow multiple investors to pool their investments
  • In both cases, assets are managed by a designated manager
  • They have a three-tiered management structure consisting of the sponsor, trustee, and Manager

However, while mutual fund typically invests in Equities, Debt, or Gold, the underlying assets of an InvIT are its Infrastructure projects. So, while the performance of Mutual Funds depends on market movements, the performance of InvITs primarily depends on how well its infrastructure holdings are performing.

InvITs in India

In India, SEBI (Securities Exchange Bureau of India) first introduced InvITs along with Real Estate Investment Trusts (REITs) as alternative investment funds in 2014. Some of the mandatory SEBI InvITs regulations for Infrastructure Investment Trusts in India are:

  • An InvIT must invest at least 80% of its total assets in completed infrastructure

Projects capable of generating income. The remainder of assets up to a limit of 20% held by the InvIT can be invested in under-construction infrastructure projects and various SEBI-approved Equity, Debt, and Money Market instruments.

  • InvITs must distribute at least 90% of their income to their unit holders as dividends on a Bi-annual basis.

There are currently 15 SEBI-registered InvITs in India and the first two publicly-listed ones were India Grid Trust and IRB InvIT Fund. In May 2021, the Power grid Infrastructure Investment Trust completed its public listing becoming the third publicly- listed InvIT in India. Additionally, NHAI (National Highways Authority of India) has filed with SEBI to launch its first InvIT which is expected to be listed on exchanges in May 2021.Responsibilities of Sponsor, Manager, and Trustee of InvITs in India As per SEBI regulations for InvITs in India, a 3-tiered management structure similar to that of Mutual Funds has to be followed. An InvIT’s 3-tier management structure consists of Sponsor, Manager, and Trustee. The typical structure of an InvIT looks like this

  • Sponsor

An InvIT can have a maximum of 3 sponsors. Usually, a sponsor is an infrastructure development company that originally built, owned, and/or operated the infrastructure assets of the trust. In the case of the India Grid InvIT Fund, its sponsor is Sterlite Power Transmission

Limited, a key player in India’s power transmission sector. The primary responsibility of the Sponsor is to set up the Infrastructure Investment Trust and appoint a SEBI-approved Trustee. As per current regulations, InvIT Sponsors are mandatorily required to hold a minimum 15% stake in the Trust for at least 3 years after the formation of the trust.

  • Manager

Usually an InvIT has two managers – an investment manager and a project manager. For example, in the case of India Grid InvIT Fund, the investment manager is Indi Grid Investment Manager Limited and Sterlite Power Transmission Limited acts as the project manager.

The investment manager of the Infrastructure Trust is responsible for ensuring that existing investments of the InvIT are providing returns as per expectations. Additionally, the investment manager is also responsible for making new investment decisions on behalf of the Trust to ensure further growth of InvIT assets. The project manager is usually a company that specializes in developing and operating infrastructure projects.The key responsibilities of a project manager include ensuring smooth operations in the case of completed projects of the Trust as well as timely delivery of under-construction projects.

  • Trustee
  • SEBI-approved Trustee is a company that has a proven track record of providing Trusteeship In the case of India Grid InvIT Fund, Axis Trustee Services Limited is the designated trustee. Key responsibilities of a trustee include holding the assets of an InvIT in trusteeship to safeguard the interests of the unit holders. Other responsibilities of an InvIT trustee include ensuring timely distribution of dividends to unit holders and overseeing the activity of the InvIT manager(s).

How Do InvITs Generate Returns for Investors?

Any investment needs to generate returns in order to attract investors. An InvIT generates revenue by operating the infrastructure projects that it owns.

For example, suppose a bridge company charges a toll of Rs. 50 for every car crossing the bridge. This toll amount is the income that the project generates. But this entire income would not be distributed to the InvIT unit holders. Expenses such as depreciation, maintenance, and cost of operations have to be deducted from the income to arrive at the “net distributable cash flow” or NDCF of the project.

To understand the concept of net distributable cash flow better, let’s consider the example of IRB InvIT Limited, which was India’s first publicly listed InvIT. The below table shows the cash flow statement of IRB InvIT Ltd. for FY 2020:

As you can see, in FY 2020, IRB InvIT received over Rs. 7,800 crore in cash inflows and after deducting outflows of over Rs. 1,743 crore, the net distributable cash flow was just over Rs. 6,000 crore. Now as per SEBI regulations, the trust is required to mandatorily distribute at least 90% of the NDCF to the unit holders. So IRB InvIT would have distributed 90% of Rs. 6,068 crore to its unit holders in FY 2020.

Infrastructure Investment Trusts can distribute their net distributable cash flow in 3 ways:

  • Dividends:

These are distributed on a quarterly or biannual basis. The dividend is paid on a per unit basis to the unit holder of the InvIT.

  • Interest:

Similar to dividends, interest pay-outs can be made by an InvIT on a quarterly or bi-annual basis. The amount paid out as interest to unit holders is calculated after deduction of withholding tax by the InvIT.

  • Capital Gains:

Just like the price of Equity shares, the price of InvIT units is subject to change depending on the performance of the Infrastructure Investment Trust. When an InvIT performs well and grows its assets over time, the price of its unit’s increases. In this case, unit holders can sell their InvIT units at a profit and receive Capital Gains from their investment.

 

                                 - CA JAYESH GANDHI

 Disclaimer: This is an informative document and opinions expressed in it are our own and not any advice. We are certified investment advisors yet to be SEBI registered. We are AMFI registered MUTUAL FUNDS DISTRIBUTOR.

 

 

 

 

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