Infrastructure India: Approaching Maturity

IIP’s focused portfolio of Indian transport and power infrastructure assets is starting to approach maturity, which should result in cash flows flowing through to the parent, in turn enabling IIP to provide dividend guidance to investors. Increasing clarity on the timing of this process and on the further potential value accruing from the VLMS subsidiary’s acquisition of Freight star, should help to close the discount to both NAV and the peer group. Longer term, the discount could also be addressed by the reduction of the 51% controlling stake of GGIC (also managed by GFPM, the asset manager), thereby increasing the free float and, potentially, stock liquidity.

Portfolio: Projects’ maturity to improve cash flows
Management’s strategy is to pay dividends when the projects reach a level of maturity capable of sustaining the payout. With four of its five investments expected to be cash flow generating by year-end and only one still in the construction phase, IIP anticipates providing clarity about the timing of dividends once VLMS is fully operational. The recent Freightstar acquisition provided an NAV boost in FY13, but VLMS has four container terminals due for substantial completion during FY14 and the potential for further synergies. Evidence of funding progress at SMHPCL would also be positive, but in our view less likely to move the share price in the short term.

Financials: Fair value gains to offset costs from FY15
IIP has a strong capital structure, with no debt at the fund level as at FY13 and, after agreeing a US$17m working capital facility with GGIC recently, sufficient funding for the foreseeable future. IIP has adopted the amendment to IFRS 10 from FY13, before its mandatory introduction in January 2014. It therefore does not now consolidate its wholly owned subsidiaries, which means anticipating the timing of project dividends is more difficult for investors. Therefore, the main income driver will remain fair value movements, which should start to offset the management and administration expenses from FY15, assuming the local currency stabilises.

Valuation: Large discount to NAV and peers
IIP trades on a discount of 67% to FY13 NAV of 78p and a wide discount to its peer group, which can be partly explained by its small free float and low stock liquidity, with the two main shareholders controlling 64%, as well as the lack of yield and the unclear dividend timing. We are not forecasting dividends for FY14-15, although the projects should start to be cash flow positive from FY15. Closing the discount is likely to require a clearer payout strategy, further financial visibility and a simpler corporate structure, as borne out by the developed market peers’ premium to NAV.

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