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Overview & Outlook on InvITs

December 2018

Definition

An Infrastructure Investment Trust (InvITs) is like a mutual fund, which enables direct investment of small amounts of money from
possible individual/institutional investors in infrastructure projects either directly or through a special purpose vehicle (SPV) to earn a
small portion of the income as return.

InvITs can be treated as the modified version of REITs designed to suit the specific circumstances of the infrastructure sector.

Real Estate Investment Trust (REITs) is an investment vehicle that owns & operates real estate-related assets and allows investors to
earn income produced through ownership of commercial real estate without actually having to buy any assets.

Structure

• Registered as a Trust with SEBI.

• Four parties are involved: Trustees (oversees the role of the entire InvIT and ensures all rules are complied with), Sponsors (firms
who set up the InvIT), investment managers (manage the assets and investments) and project managers (executes projects).

Features

• Higher than prevalent fixed income yields while risk profile is much lower than equity investment.
• Stable income - At least 90% of the net distributable cash flows of the InvITs shall be distributed to the unit holders of InvITs.
• 80% of assets of an InvITs are in completed and revenue generating infrastructure projects, which reduces risk.

Valuation Methodology

Closing price on the exchange is used for the valuation. Incase if InvITs are not traded on the valuation day or are unlisted then valuation
committee would recommend appropriate valuation methodology to determine the fair value.

InvITs exposure in DSP Schemes:

As of November 30, 2018, we have exposure to the following InvITs:

• India Grid Trust

• IRB InvIT

Key highlights:

India Grid Trust:

• We are of the view that India Grid Trust will be the beneficiary of rise in demand for transmission capacity due to rising share of
renewable energy, regional power demand supply mismatch and upgradation of existing transmission lines.
• India Grid Trust has steady cash flow generating business model as power transmission assets offer stable cash flows due to
absence of traffic risks/operating risks, minimal counterparty risk and lower operating expenses.
• India Grid has strong sponsor assets on the anvil for acquisitions and plans to become a Rs.30,000 Cr AUM trust over the next 5
years with aggressive plans to acquire assets.
• India Grid continues to maintain 4-5% annual growth in dividend per unit over the next 3-4 years led by steady assets acquisitions.

IRB InvIT:

• Adjusted for the capital reduction, unit price is down 28% since listing in May 2017. Implied IRR as per management stands at 20% vs
12% on listing. The guidance for full year FY19 distribution stands at Rs 12.3 per unit implying yield of ~18%
• As of FY18 net leverage stood at 23.15% vs regulatory cap of 49% which gives leeway for future asset injection and growth once
price recovers.
• We note that the traffic in 2 assets have been hit due to sand mining ban, thus driving the current toll collection below the
management expectation.
• New project accretion from the sponsor, looks difficult at such high implied IRR. The Fund is the benchmark for future listings.
• The stock is grossly undervalued at this price. With correction in Government Securities yield and possibility of a rate cut on lower
inflation gives us hope of price appreciation.
Detailed Update

India Grid Trust:

Background:

India Grid Trust Ltd. (IndiGrid – Listed in June 2017) is India’s first infrastructure investment trust (InvIT) to own inter-state power
transmission assets. Sponsored by Sterlite Power Grid Ventures Ltd. (SPGVL), India Grid currently has six operational transmission
assets (including recently acquired first third party assets – Patran Transmission) with right to acquire seven more from the sponsor.
We expect company to be the beneficiary of rise in demand for transmission capacity due to rising share of renewable energy,
regional power demand-supply mismatch and up-gradation of existing transmission lines.

Investment Rationale:

Steady cash flow generating business model: Power transmission assets offer stable cash flows due to absence of traffic
risks/operating risks that are faced by road assets. Payments are assured due to minimal counter party risk, as revenues accrue
from tariffs contracted for the long-term (going up to as high as 35 years). Operating expenses (O&M) are also much lower at 5-6%
of revenues than 20-25% for operational road projects.

AAA rated cash flows - Minimal counter-party risk: Tariffs for all transmission assets are billed and collected pursuant to the
‘point of connection’ (“PoC”) mechanism, a regulatory payment pooling system offered to inter- state transmission systems. Under
the PoC mechanism, Power Grid Corporation of India acts as the revenue aggregator and collects payments from all the customers
based on the inputs received related to utilisation of the transmission network. The pooling mechanism ensures that there is no
stranded asset risk i.e. no bilateral counterparty/user. This differentiates it from other annuity assets like power generation and road.
Also the assets carry AAA rated cash flows with minimal counter-party risk, which makes power transmission one of the steadiest of
businesses with revenues coming from tariffs contracted on long-term basis.

Strong Sponsor assets on the anvil for acquisitions: As per management, currently there are seven sponsor assets (Right of
First Offer (ROFO) on five assets) for acquisition, out of which two are fully commissioned and five under construction (including one
partly commissioned). These assets consists of eight substations and 25 transmission lines covering 4,640 ckms of circuit length.
The company is actively pursuing third party assets and new term bids for acquisitions. India Grid recently acquired its first third
party asset PTCL at a consideration of Rs. 230 Cr. The company has plans to become a Rs 30,000 Cr AUM trust over the next five
years which we believe achievable given its aggressive plans to acquire assets (ROFO and third-party) and strong pipeline of Tariff
Based Competitive Bidding (TBCB) based tenders (~Rs 8,330 Cr as on August 2018) in the market.

ENICL, NTL and OGPTL would be acquired in FY20: Over the next one year, India Grid has planned to acquire East North
Interconnection Ltd (ENICL), NRSS XXIX Transmission Ltd. (NTL) and Odisha Generation Phase II Transmission Ltd. (OGPTL). The
tentative enterprise value (EV combined) is ~Rs. 6,390 Cr. Collectively, the three assets are expected to contribute incremental
average revenue of ~Rs. 800 Cr over the next five years. The acquisition will be funded through both Debt and Equity (50:50).

Investor return: Investor return in India Grid which is a quasi-equity instrument will be a combination of quarterly dividend and stock
price appreciation. The company has guided for dividend per unit (DPU) of Rs 12 per unit for FY19 which is in-line with our estimate.
Going ahead for next three to four years, we expect India Grid to maintain 4-5% growth in DPU due to robust asset pipeline from
Sponsor.

Attractive dividend yield 10-11%: We project the InvIT cash flows under the assumption of an average 100% dividend pay-out and
zero withholding tax for DII’s, resulting in an average pre-tax yield of 10-11%. The yields are better than that of debt products,
though there is debt like stability in cash flows, with upsides from future project acquisitions.

Best in-class corporate governance: India Grid is regulated by SEBI in India. The trust has to appoint three key independent
parties namely Project Manager (Sterlite Power Grid Ventures), Investment manager (Sterlite Investment Managers Ltd) and Trustee
(Axis Trustee Services Ltd.) who works on nominal fee model. Sterlite Investment Managers Ltd is run by independent, diversified
and experienced board and well experienced management team which takes independent decisions on the regular/strategic
decisions of trust.

View & Valuation: We remain positive on the company due to its steady business model with robust TBCB pipeline. The company
continue to maintain 4-5% annual growth in DPU over the next 3-4 years led by steady asset acquisitions.

Source: India Grid Trust fillings to Exchanges, Annual Reports.

About IRB InvIT:

Background:

IRB InvIT is the only publicly placed listed InvIT in road sector: IRB InvIT is t he only listed public InvIT (Infrastructure
Investment Trust) in the road sector as the asset class has struggled to generate investor interest due to its complex nature and
initial uncertainty on taxation at the hands of investors. While existing investors may be well aware of the product functioning now, a
wide set of investors continue to give it a miss. As a result, there have been only two other listings: India Grid InvIT Fund in power
T&D with Sterlite Power Grid Ventures as the sponsor and IndInfravit Trust in road sector with L&T IDPL as the sponsor. IndInfravit
Trust is a privately placed listed InvIT and highly illiquid. The company currently owns 7 Road assets while it has ROFR on 13 road
assets which gives clear visibility of future growth.

Price down 33% since listing, makes it harder for future listings: Unit price of IRB InvIT Fund is down 33% since listing in May
2017 vs. Nifty’s +10%. During the same period, the Fund has distributed Rs. 4.5/unit as return of capital. Adjusted for the same, the
price of units is down 28% since listing.

Investment Rationale:

Management expects IRR of 20%+ at Current Market Price (CMP) : As per the management, at CMP, the implied IRR for the
units is 20% vs. 12% at listing. Till date, the Fund has distributed Rs. 10.55 for FY18 and Rs. 6.05 for 1H19. The guidance for full
year FY19 distribution stands at Rs, 12.3/ unit, implying yield of ~18%.

We note that toll collection has fallen short of initial expectation: Of the 7 projects in the InvIT, traffic in 2 projects – Jaipur Deoli
and Pathankot Amritsar has been adversely hit due to sand mining ban in respective states of Rajasthan and Punjab (Based on the
latest IRB InvIT filling to Exchanges). Thus, the current toll collection is below management expectation. Management believes that
the traffic should rebound back to the initial expectation in FY20 as the mining ban decision reverse. Recently, the Punjab
government has lifted the mining ban and the recovery in traffic may be visible over next 2 quarters. Management expects a similar
decision in Rajasthan as well, post the state elections.

Asset injection is difficult given current high yield of IRB InvIT: IRB InvIT has the Right of First Refusal (RoFR) over the 13 road
projects of the sponsor, i.e. IRB Infrastructure. Any acquisition of the asset needs to be valued by an independent valuator and put
to vote by minority shareholders. Logically speaking, a successful asset acquisition should lead to an improvement in yields.
However, if the InvIT itself has a high implied IRR 20% vs. the market IRR for such acquisitions (13%-15%), asset injection becomes
difficult.

As of FY18, gross debt stood at Rs17.4bn vs. nil at the time of listing as the Fund used the debt financing to acquire 1 toll road
asset. The cost of debt was 8.15% (MCLR + 0.15%).

As of FY18, net leverage stood at 23.14%. Note that the InvIT regulations put the cap on the net leverage at 49%.It gives leeway for
future asset injection and growth once price recovers.

View & Valuation: The stock is grossly undervalued at this price. With correction in g-sec yield and possibility of a rate cut on lower
inflation gives us hope of price appreciation too.

Source: IRB InvIT fillings to Exchanges, Annual Reports.

Details about latest portfolio holdings:

As of November 30, 2018 InvITs are held in DSP Equity Savings Fund. The details are as follows:

Particulars India Grid Trust IRB InvIT Fund

Initial Book Value of Investment (Cr) 45.71 43.56
Current Book Value (Cr) 45.45 41.74
Current Market Value 40.58 30.23
% to Net Assets 2.67% 1.99%
Source: Internal, Data as of November 30, 2018
 SCHEME PRODUCT LABELLING & SUITABILITY RISKOMETER

This Scheme is suitable for investors who are seeking*

DSP Equity Savings Fund
• Long term capital growth and income
(An open ended scheme
• Investment in equity and equity related securities including the use of
investing in equity, arbitrage
equity derivatives strategies and arbitrage opportunities with balance
and debt)
exposure in debt and money market instruments

*Investors should consult their financial advisors if in doubt about whether the scheme is suitable for them.

Disclaimer: “In this material DSP Investment Managers Pvt. Ltd. (the AMC) has used information that is publicly available, including information developed
in-house. Information gathered and used in this material is believed to be from reliable sources. The AMC however does not warrant the accuracy,
reasonableness and / or completeness of any information. The data/statistics are given to explain general market trends in the securities market, it should
not be construed as any research report/research recommendation. We have included statements / opinions / recommendations in this document, which
contain words, or phrases such as "will", "expect", "should", "believe" and similar expressions or variations of such expressions that are "forward looking
statements". Actual results may differ materially from those suggested by the forward looking statements due to risk or uncertainties associated with our
expectations with respect to, but not limited to, exposure to market risks, general economic and political conditions in India and other countries globally,
which have an impact on our services and / or investments, the monetary and interest policies of India, inflation, deflation, unanticipated turbulence in interest
rates, foreign exchange rates, equity prices or other rates or prices etc. All figures and other data given in this document are dated and the same may or may
not be relevant in future.
For scheme specific risk factors and risk associated with InvITs, detailed investment strategy and more details, please read the Scheme Information
Document, and Key Information Memorandum of respective Scheme available on www.dspim.com

The portfolio of the scheme is subject to changes within the provisions of the Scheme Information document of the scheme. The sector(s)/stock(s)/issuer(s)
mentioned in this note do not constitute any research report/recommendation of the same and the Fund may or may not have any future position in these
sector(s)/stock(s)/issuer(s). Past performance may or may not sustain in future and should not be used as a basis for comparison with other
investments.

The document indicates the strategy/investment approach currently followed by the Schemes and the same may change in future depending on
market conditions and other factors.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.