Infrastructures India plc (IIP) is a closed-end investment fund based in the Isle of Man with a portfolio of Indian assets valued at £326 million in its recently published interim report to end September 2016.
More than 80 per cent of the portfolio is invested in the wholly owned subsidiary Distribution and Logistics Ltd (DLI), which runs four large container terminals and provides transportation services across India. The remainder is invested in renewables: one wind farm company, also wholly owned, and two hydropower companies. A fifth investment, in toll roads, was divested in April.
Not surprisingly DLI receives the most attention in the interim report. It has been expanding, with a new customs bonded area near Nagpur in central India and similar areas under development near Bangalore and Delhi. Market share has been increasing but competition is fierce and IIP admits that DLI did not generate an operating profit during the period.
The wind farm company, Indian Energy Ltd (IEL), owns and operates two wind farms in the south of India with a total capacity of 41.3 Megawatts. Load factors have increased to a satisfactory 30 per cent in the last six months thanks to a stronger monsoon and improved grid availability.
IIP bought IEL in 2011 but have made no investment in further capacity since then. This is disappointing. What might have been a reasonable stake at that time is now tiny compared with total Indian wind capacity reaching 30,000 MW and with government plans to double that.
One of the hydropower companies, India Hydropower Development Company (IHDC) is a 50/50 partnership with Dodson-Lindblom International, an Ohio-based engineering company, who are the operator. IHRDC owns and operates six small plants in Maharashtra, Madya Pradesh and Himachal Pradesh with a total capacity of 62 MW.
A further 12 MW will be added at a new site in 2017 and 9 MW more at a later date. Actual production depends on the monsoon and the demand for water from reservoirs. IIP expect that climate change will have some negative effect.
The other hydropower investment is a 31 per cent stake in Shree Maheshwar Hydel Power Corporation (SMH). SMH is building a 400 MW plant with ten turbines on the Narmada river in southwest Madya Pradesh. This is a large project (by comparison, total UK hydropower capacity is 1759 MW) but has run into problems with the principal lender. The project is well advanced, with three turbines already installed, but to quote IIP “ it is yet unclear what approach will be taken to revive the project”.
The Net Asset Value per share was calculated as 48p in both September and March 2016, but has been steadily dropping from 109p in March 2010. The share price quoted on AIM has also dropped from a high of around 80p in 2011 to 8.25p today.
NAV is the fair value of the investments calculated using discounted cash flow. A key input is the interest rate, which is the Indian Central Bank rate at the time plus a risk factor that depends on the business. Another key factor is the pound to rupee exchange rate. Both have been favourable over the last year, so the apparent stability disguises other more negative factors.
It turns out that 75 per cent of IIP’s shares are held by GGIC (ex Guggenheim Global Infrastructure Company, a private US infrastructure and energy company) or its affiliates, who have the nearly the same directors and asset management team as IIP. Furthermore IIP have a loan of US$17 million from GGIC due in April 2017 for whose replacement the Board is currently exploring options. The small liquidity may make the stock less attractive to investors.
IIP’s future will be determined by GGIC based mainly on that of DLI, but there is still hope that it will increase its modest investment in hydropower.