Why IRB Infra stock declined on the day of InvIT listing?

Increased risk exposure from ongoing projects could be one of the reasons

The IRB Infrastructure Investment Trust (Inv-IT) traded flat on the day of its listing, close to the higher end of the IPO, at Rs 102. In contrast, the stock of IRB Infrastructure, the parent company which is the sponsor of this investment trust, was down more than 6 per cent on Thursday.

IRB InvIT is the first of its kind infrastructure investment trust listed on Indian exchanges. By transferring six of the revenue generating assets to Inv-IT, IRB Infrastructure raised more than Rs 5,000 crore through this initial public offering and offer for sale. The InvIT unit which could be purchased for minimum amount of Rs 10 lakh per unit during the IPO can be traded at a minimum lot size of Rs 5 lakh per unit in the secondary market.

This InvIT intends to pay off the entire debt, close to Rs 3,300 crore, raised by IRB for the six transferred projects. The additional money of more than Rs 1,200 crore raised through this offering is expected to be used by IRB as an equity infusion for its other projects.

Risk exposure up

The fall in IRB’s stock price can be partially attributed to increased risk exposure from the ongoing projects in the company’s kitty. A road project consists of the following risks – pre-construction risks for identifying road projects, construction risks which involve fluctuation in raw material prices, environmental clearance risks, political risks, revenue risks, finance risks and traffic risks.

With six of the cash generating projects transferred to the InvIT, and all of these having successfully passed through most of the risky phases, we expect the trust to give an yield of 11-13 per cent over the next few years.

However, deprived of the steady cash flow from these stable projects, the remaining portfolio of projects with the parent company should hold a higher degree of risk. Thus, we can expect a marginal correction in the stock price of IRB Infra as these risks are factored into the pricing. But, the silver lining for the stock comes in the form of reduction in debt in IRB books.

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