With the season of deepening inflation and rising interest rates taking full effect in the current environment, we have a non-convertible debenture (NCD) offering from a leading toll road operator that comes with interesting features.
National Highways Infra Trust (NHIT) is an InvIT (Infrastructure Investment Trust) sponsored by the NHAI (National Highways Authority of India). InvIT is now presenting an NCD offer with a coupon of 7.9 percent, payable semi-annually. The NCD has a total term of 25 years.
The company is rated AAA by CARE Ratings and India Ratings. NHIT’s NCD offering begins October 17 and ends November 7 and aims to raise up to ₹1,500 crore from the issue. Allocation is based on the “first come, first served” principle.
Should you choose these NCDs given their high rating and relatively attractive coupon rate?
The NCD structure of the NHIT
As mentioned, the NHIT NCD has some interesting features.
Introduction of STRPP s: The full NCD will be split into three STRPPs (separately transferable and redeemable main parts). NHIT NCD’s full face value is £1,000. But it will be divided into three parts. STRPP A with 13-year term, STRPP B with 18-year term and STRPP C with 25-year term. The face value of ₹1,000 is divided into ₹300, ₹300 and ₹400 for the three STRPPs. All will carry the same coupon rate.
Each of the STRPPs is traded separately on the exchanges when the NCD is listing.
Periodic capital repayment: Unlike other NCDs, which typically pay principal at maturity, NHIT’s offering would begin principal repayment on the eighth anniversary – November 2030. In November 2030, ₹50 of the nominal value would be repaid in addition to the interest component. On each subsequent anniversary, £50 would be returned to NCD investors by the 13th th Jubilee (2035) when the tenor of STRPP A comes to an end. In 2035 there would be a repayment of ₹100 since the repayment of STRPP B along with the interest portion would start in the same year. Thereafter, £50 would be paid at the end of each anniversary until 2040, when STRPP B expires. In 2040 £100 would again be paid as STRPP C would start paying back principal even when STRPP B matured. At the end of 25 years – November 2047 – there would be no outstanding principal to be repaid.
Coupon would be paid on the reduced face value: Upon each payment of principal as described above, interest would be paid on the outstanding principal. So at the end of the eighth year, interest would be paid on the face value of ₹950. The next year, 2031, the coupon would be paid out at ₹900.
In 2036, interest would be paid on the face value of ₹600 and so on.
How is the yield? With regular interest payments along with periodic capital gains, the yield (XIRR based on cash flows) on the NCD over the 25-year term is 8.05 percent, making it quite attractive, especially considering the long term. Please note that you can only realize the return of 8.05 percent if you stay invested for the entire 25 years. An interim exit via the stock exchanges changes the returns.
The minimum investment required is ₹10,000. STRPPs would be awarded based on the amount invested.
All coupon payments will be taxed at the flat rate applicable to you. Capital gains realized from the sale of NCDs after they have been held for a year would incur a 10 percent tax on the gains.
NHIT is an InvIT and owns 100% interest in a Project SPV (NHIPPL) entitled to toll, operate and maintain a number of roadside facilities. It currently has five road facilities passing through states such as Rajasthan, Gujarat, Maharashtra, Karnataka, Telangana and Andhra Pradesh. It will soon gain access to three more sections via roads passing through Uttar Pradesh, Maharashtra, Madhya Pradesh and Telangana. The revenue model is TOT or Toll-Operate-Transfer. NHIT’s financials are pretty strong, and the prospects for revenue growth also appear robust.
– In FY22, NHIT reported revenue from operations of £139.6m and net profit of £68.4m (it only started operations in December 2021). In the first quarter of FY23 InvIT has already posted operating income of £137.4m while net profit was £62.8m. With the three other roadside assets likely to contribute to revenue, growth prospects look good. According to Ind-Ra, NHIT’s toll revenue in the 5MFY23 was £229.8 million.
– Since these toll road regulations run over a very long period of 20 to 30 years, the income is also sufficiently visible.
– Periodic toll increases are guaranteed. The rate of increase would be 40 percent of the wholesale price index from December last year plus a guaranteed 3 percentage points. With the WPI well into the double digits, toll increases should be robust for the SPV project.
– The ratio of long-term debt to shareholder funds is currently a robust 0.24. After the NCD output, it would rise to 0.39, which is still pretty good. Debt coverage ratio (operating cash flow/(interest paid plus principal repaid)) is strong at 4.6 in June 2022, as is interest coverage (EBITDA/interest expense) at 4.47.
What should investors do?
There is no doubt that NHIT’s NCDs are attractive to retail investors. The issue enjoys the highest rating and also offers higher yields than comparable government bonds.
For example, the 07.06 GS 2046 is trading at a yield of 7.55 percent (based on LTP). The 06.99 GS 2051 offers a yield of 7.61 percent.
Investors, or even those looking for a steady stream of income after retirement, may consider parking a portion of their debt portfolio in these NCDs. As previously mentioned, persevering over the full 25 year period is crucial.