A Safer Way to Make 12% Returns
In this issue, we examine - a) a unique, special situation scenario at JTL Industries Limited and b) how InvITs offer equity-type returns at debt-type risk levels
I hadn’t been keeping well for the past 3 weeks & sincerely want to thank everyone for your kind wishes over Youtube & email. The throat’s a bit sore still but I’m doing a lot better now. Youtube videos will resume from early next month and until then, here are a couple of stories that I’m sure you’ll find interesting & investible :)
Story 1 of 2 (Reading time: 2 mins)
JTL Industries: When Promoters are Happy Paying More than Market Price
JTL Industries Limited is in the business of manufacturing & marketing premium-quality structural steel tubes and pipes that are used across infrastructure projects incl. agriculture, water distribution, solar projects, construction and building materials
The company is a small cap - just ₹4,000 crores in market cap - but on the 18th of December in a significant move, it sought to raise ₹1,310 crores in additional funds (announcement)
This money is slated to go towards a huge capacity expansion project in Maharashtra and if I have my math right, the company seems to be targeting a total capacity of 20 lakh tonnes in the next 3-4 years (current capacity is 6 lakh tonnes)
Infact JTL Industries has been quite aggressive on this front and prior to this fund raise, it additionally secured ₹384 crores via a preferential allotment to augment annual production capacity to 10 lakh tonnes. And with even more capacity planned, the company is expecting big demand for galvanised pipes over the next 5-7 years
OK, let’s get back to the financing bit
Of the ₹1,310 crores - the promoters & non-promoters will put in ₹540 crores and ₹270 crores by way of fully convertible warrants while the balance ₹500 crores will be raised through a QIP
The noteworthy point here is the price of these warrants which has been set at ₹270 i.e. at a premium of 12.5% over the closing per-share price of ₹240 on the day of the announcement
This reflects a special situation, a rare scenario where promoters have injected capital into a company at a valuation that’s above the prevailing market price
On why someone would pay above-market rates, the logical expectation would be positive triggers incl. favourable news, growing demand, improved margins etc. some of which, the JTL Industries team has been highlighting in recent earnings calls
Our research further shows that this is not an isolated case and recently, companies like Swan Energy (article) and Texmaco Rail & Engineering (corporate announcement) have done preferential issues at a noticeable premium
In both instances, the markets responded positively tagging the move as a value-enhancer which instils confidence amongst stakeholders regarding the company's future prospects
My learning here is to look at these situations as powerful catalysts that might not only offer immediate capital appreciation but can also attain multibagger status over the long term
And if you want to take a steely shot at it – shares of JTL Industries Limited are still available at a 9% discount to the price of those warrants. Happy investing!
This story was researched by the team at Beat The Street. Subscribe to their page at X for more case studies especially on forensic research
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Story 2 of 2 (Reading time: 4 mins)
12% Yield to Power Up Your Fixed Income Portfolio
This second story is one that offers equity-ish returns at debt-ish risk
Infrastructure Investment Trusts (or InvITs as they are commonly called) invest in roads, railways, airports, data centres, telecom towers, gas pipelines, power transmission projects etc.
These assets are expected to generate steady & predictable cash flows (like a debt instrument). Further, InvITs are traded on the stock exchange which means the price is subject to daily change (like equity). For more details on the structure, regulations, taxation etc., kindly read, read & watch
An InvIT’s distribution yield (i.e. annual receipts per share as a % of the current share price) is of much interest to investors and presently the distribution yield is around 12% for most InvITs
A pre-tax 12% from a relatively safe asset is worth one’s consideration but remember – an yield is different from an interest rate, and there’s always that possibility of the numerator (distribution per unit) doing better or worse than expected
Which is why evaluating an InvIT needs to go beyond the yield and there are 5 key areas to look for:
Quality of Asset (rules governing future cash flow & re-pricing of contracts)
Predictability of cashflows (cashflows from power transmissions & telecom towers are more predictable than airports or a warehouse)
Asset tenure or Concession period (length of time InvIT has the right to operate an asset; higher is better)
Loan to value (lower is better & the rules allow for upto 70% leverage)
Asset pipeline (more is better & for revenue streams to increase, an InvIT needs to add more quality projects and participate in growth opportunities)
To understand this better, let’s examine one of the bigger InvITs - India Grid Trust (also known as IndiGrid)
IndiGrid was established in 2016 and owns/operates/manages assets in the power transmission & renewable energy space
► The typical project yield here is in the 10% to 12% range which indicates good asset quality. It’s a number investors should continually track
► Another key metric is the asset tenure or the average residual contract, which in IndiGrid’s case is 27 years for the transmission assets & 18 years for the solar assets. Infact, a stated focus of the trust is to expand asset tenures using upcoming acquisitions - which is definitely a plus point
In comparison, PowerGrid InvIT (PGInvIT) transmission service contracts have 29 years of average residual life
► In terms of assets, IndiGrid’s Q2F24 AUM stands at ₹26,900 crores and has grown at a remarkable 44% per annum since 2019. Additionally, the trust has ₹4,670 crores of solar assets.
With re: the asset pipeline, IndiGrid’s short term target is to take the transmission assets up to ₹30,000 crores for which the trust has identified bids in excess of ₹1,40,000 crores. Very clearly - AUM growth is a priority for IndiGrid
In contrast, PGInvIT has not been adding assets and is persisting with it’s 5 operational projects for many years now. This is a big negative & its the reason why the quarterly DPU is constant at ₹3.00 for the last 8 quarters
►Pleasantly IndiGrid’s cashflows are quite predictable.
The reason being - many of their inter-state power transmission projects are on an availability-based tariff i.e. they are incentivised to provide high system-reliability and are paid irrespective of the quantum of power transmitted through the line. More specifically, the operator is entitled to receive an incentive amount when availability is in excess of 98% and as seen below, IndiGrid has done well to stay above the 98% mark
► This efficiency & mode of pricing helps IndiGrid pay out an adequate and accelerating net distributable surplus to its unitholders every quarter
► Leverage is another important factor and IndiGrid’s net-debt-to-AUM is presently at 60.1% - which is close but below SEBI’s 70% capping. This gives IndiGrid a healthy coverage ratio of more than 2 times.
The trust also holds ₹1,041 crores in cash which is inclusive of ₹370 crores in DSRA (i.e. debt servicing reserve account; meaning) and ₹241 crores towards distribution. A sizeable cash balance to manage immediate obligations is a sign of strength
👉 My Viewpoint
IndiGrid has managed to check all boxes so far and is one of, if not the marquee pick amongst InvITs in India. And with India aiming to double infrastructure spends to ₹143 lakh crores until the year 2030 (article), all InvITs have some healthy tailwinds to work with if they choose to exploit it
But no operation is without risks. As an investor, one should be watchful of natural calamities (like floods in North & East of India), delays in collection, traffic numbers, refinancing risks etc. - anything that might bring a fall in revenues
Additionally, InvITs are traded on the stock exchange and unit prices can move either ways - even downwards as we have seen in the case of PGInvIT that has lost about 26% this year
All said & done, my point is – a 12% yield in a relatively safe instrument is always welcome. And with the equity markets a little stretched in terms of valuations, an InvIT can be a good, strong alternative for practical investors
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Wishing you a merry Christmas and a Happy New Year
Much Love,
Shankar
Thanks for sharing these valuable information. your contents are always great to read. get well soon.
Well written, overall the content is pushing me towards learning so many concepts which am I unaware about. Thanks for the post, look forward hearing from you.