IRB Infrastructure Trust Fund (FER) Earnings Call Transcript & Summary

Good afternoon, everybody. This is Natalia del Olmo speaking. I would like to welcome you to this conference call to discuss the recent announcement regarding Ferrovial's agreement to acquire 24% of IRB Infrastructure Trust. Just as a reminder, the presentation is available to you on our website. I am joined here today by Andres Sacristan, Cintra's CEO, who will be leading this conference call. And Ernesto Mozo, Ferrovial's CFO; and Jose Maria Velao, Cintra's CFO. At the end of the presentation, there will be a Q&A session. [Operator Instructions] Please note that the Q&A session will refer exclusively to the IRB transaction. With all this, I will hand it over to Andres Sacristan. Andres, the floor is yours.

Thank you, Natalia. Hi, everyone. Thanks for connecting to this call. We are going to describe the transaction we announced last week in India. In this transaction, we acquired stake 24% stake of IRB Infrastructure Investment Trust, what we call the Public InvIT called IRB for EUR 740 million. This transaction is a balanced risk reward transactions with capacity to create value immediately. We try to capture the growth in India's market with direct exposure to new projects. And with this, we will reach a better alignment of interest among our partners. With all these transactions, we complete our investment strategy of acquisitions in India. And now we are ready to capture the growth of the market. Let me go first before entering into the transaction itself to review what IRB performance has been since our entry in December '21, when we acquired 24.86% of IRB Infrastructure Developers. At that time, the price of the acquisition was INR 21. Since then, the company has had a healthy EBITDA growth with impressive asset increase that has been reflected by the market along this time and IRB surprise, as you can see in the timeline above. IRB has also had good access to capital markets. In a recent transaction, the issuance of $540 million bond. Also today is top of India in its class in ESG rankings and metrics. And more importantly, their TSR to date has an impressive value. Now let's talk about the transaction and the Public InvIT itself in which we acquired this 24% from GIC. The Trust has a portfolio of 15 concession, out of these 15 concessions 3 of them are under construction. It has a remaining average concession life of 21 years and both construction and operational risks are held at IRB Developers level, having only traffic risk at Private InvIT level. Now let's focus on the growth we see in the market. India is the fastest-growing economy in the world. The concessions is that the GDP will grow over 6% in the coming years. All this translates in a necessity for infrastructure. And this most immediate necessity is led by logistic competition but also the need for demographic needs with an important middle-class population accessing to vehicles. Indian government is conscious about this and have put in the market an outstanding plan for total development of EUR 23 billion. Our teams keep working to identify the best value opportunities within this plan. Finally, let's see how we agree the price with GIC. As you know, our team has been contributing since '21 to the growth of this company. And this contribution is reflected in the price of the 5 new assets on the portfolio that we acquired at good value. And the remaining 10 assets we bought in are fair market value. You can see the details of each of the assets in an annex to this presentation. As the new asset -- new 5 assets became operational, we are going to create value immediately with this acquisition. To summarize, this acquisition has a balanced risk reward with immediate value creation capacity. We are now better positioned to capture growth from substantial pipeline in the Indian market. And with this, we complete our acquisitions in IRB Group, aligning partners' interest towards growth. Thanks for your attention. And now Natalia?

Thank you, Andres. Now we open the floor for a Q&A session. Thank you.

[Operator Instructions] Our question comes from Luis Prieto from Kepler Cheuvreux.

Luis Prieto here from Kepler. I have 3, if I may. The first one is, I would like to know what the IRR of the investment is? I'm asking in the context of high double-digit equity -- cost of equity that you use for high complexity assets in North America. I just wanted to compare what you've done versus what you've been doing historically. The second question is why GIC is diluting its exposure to the vehicle? And the third one is if there is any intention to reduce the complexity of the structure by collapsing it in any way or even list higher IRB Infrastructure Trust at some point in the future?

Thank you, Luis, for your questions. Regarding IRR, we will keep our policy to be on the double digit. As in comparison relates we always keep into account the market risk. And we -- this is the case in this transaction, we took into account the India's marketplace. So this is the adjustment we made to our policy to reach to the IRR of this transaction. Regarding to the rationale of GIC to sell to us after diluting. I think that they appreciated from the beginning, which is our contribution to IRB with our knowledge and with our expertise. I think that, that's the main reason because they sold to us and they see that valuing that. And they see that the 3 of us together at Private InvIT level, we will make the vehicle growth better. And regarding the complexity, all the structure is on IRB's Board and the partners to discuss that but today there's no discussions about that.

The next question comes from Sathish Sivakumar from Citi.

Yes. I got 2 questions here. So firstly, do you see further scope to ease your holdings here at some point if GIC wants to dilute further deals, do you see scope to increase beyond your 24%? So that's one. And then is there any further lockup involved with GIC or the IRB or it was your acquisition -- was your transaction? And then secondly, in terms of -- do you have any visibility like, say, the concession life is 21 years but if you compare with your other portfolio in North America, which is -- have a longer concession duration. What is the, again, rational year do you go -- see scope to increase the durational concessions by bidding for the other projects here?

Sathish, thank you for your questions. If I understood well, we see further scope for GIC to keep selling us on Private InvIT. We don't see that. Well today -- there's no conversation on the table about that today. And the second question, could you please repeat because I didn't...

So is there any lockup year -- is there any further lockup period for GIC, not just to you, [ you can't ] offload to anyone else for 12 months or 2 years. I just wanted to understand just general lockup.

You mean by lockup an EBITDA or anything like that in the governance?

Is more like a GIC [indiscernible] you can sell it to IRB or someone else for the dilutive stake in the next 6 months or in the next 3 months?

No, there's no such a thing in the future.

So they do like there's no such restrictions on them, yes?

No. And the third one was about in the term of the concessions. These are market driven basically is what high puts in the market, and through what the IRB has been tendering. And I think that depending on the complexity of the player and some terms of the concessions are longer than others but that's market driven.

One more, sir. Can I just to ask one more. In terms of your cash investments into this structure, would you foresee like CapEx commitments coming through?

In terms of acquisition, I think as I said that this is the latest and the last, we have basically in our strategy. And in terms of CapEx to growth Private InvIT produces cash flows and it depends what was on the speed and the size of the projects that will be awarded.

[Operator Instructions] There are no further questions at this time. I would like to hand back to Natalia del Olmo. Thank you.

Thank you. We have some questions from the webcast. First set of questions comes from Elodie Rall from JPMorgan. What is the rationale of owing just 36% or a stake and wouldn't be better to consolidate the asset? It is adding to the complexity of the group for investors, especially U.S. investors.

Well, as you know, when we started to approach this in '21. The [indiscernible] with these 2 companies, the Private InvIT and Developers. Developers is listed in Mumbai and the 24.9% is the top for going full takeover. So that's what we are going to stay. And equalizing our participation with GIC in Private InvIT what makes sense from the point of view of the business and collapsing or not, as I say the decision of IRB Board and there's no discussion about that at the moment.

Next question from Beltran Palazuelo from DLTV. What hurdle rate have you applied to the operating assets? And what hurdle rate to the asset in development? What rupee exchange rate have you assumed?

The question of Beltran, I think the hurdle rate is to IRB to disclose is the one that we are not disclosing that. And regarding the exchange rate, we us EUR 89 a rupee.

Next set of questions from Gregor Kuglitsch from UBS. First question, does the asset pay dividend? And if so, how much?

As I said, the Private InvIT produces free cash flow and is subject to the performance of the assets every year and to the decision of the partners on the distribution. So we don't discuss that. We didn't do multiple valuation here with on this current cash flows to our IRR. And there is an independent valuation on the Private InvIT done by KPMG and is published and [indiscernible] IR can help you to find it.

Okay. Second question from Gregor. What is the EBITDA multiple on the operational assets?

Sorry, I read through the script. So we are on the second one. We didn't do a valuation by EBITDA multiple. We do by discount on cash flow. So that's how we do the valuation of this acquisition.

And last question from Gregor. There was an independent valuation using cost of equity or IRR of 14% in local currency terms. Are you in line with this?

We're not disclosing the IRR. I mean I refer to what I said at the beginning about the double-digit adjusted by market risk, and that's what we disclosed. Thank you.

The next set of questions is coming from José Manuel Arroyas from Santander. First question, what is the time line for Ferrovial's equity ticket with the payment happen all at one time?

We are expecting to do financial close in a few months after approval by the authorities -- Indian authorities. At the moment, the upfront payment will be [ EUR 706 million ] and the remaining amount will be disposed later on when -- as the construction progress on the projects and equities needed.

Second question from José Manue. Can you clarify the meaning of the sentence that this investment completes Ferrovial's investment in Indian market? Does it mean that Ferrovial rules out any additional equity contribution in the future?

It means that we are not going -- we don't plan to do any further acquisitions. That's what I mean. This is the level of investment we are comfortable with and additional equity contribution will depend on a number of quarters, as I say, speed and size of the players we capture that growth and the Private InvIT is not able to fund by itself with their free cash flow.

Next question from Filipe Leite, CaixaBank, is there any [indiscernible] in the future potential transactions?

We'll then disclose the [indiscernible] since our confidential on the partners. So sorry, I can't answer that one. Thank you.

We have a question from Abhishek Thanvi from Tribune Investment. Are the new assets already operational? If not, by when are they expected to begin operations? Does IRB have all the approvals required to get them operational?

Thank you. Out of the 15, there are only 3 under construction. All other 12, including 2 of the new assets are operational. And the 3 under construction are expected to finish and as Palsit Dankuni after the summer this year [indiscernible] Ganga are expected to finish summer next year -- summer '25, beginning in this summer.

Next question from Andy Jones from HSBC. What is the extension between projects undertaken by IRB Developers on the IRB InvIT? It appears there is some greenfield risk in these new projects. What is the reason they are in the InvIT and not Developers?

Well, basically, the mechanics is one IRB, which is the promoter decides to tender a project, they propose that project to the InvIT investors and is on the InvIT investors to accept a bit or not, if they don't accept them go to that project and IRB still wants to tender that, they can go to the IRB Board and approve that tendering and if they awarded that asset will stay in IRB. That's what's been the mechanics, and that's the mechanics of being -- it's not a matter of risk. As I said, EPC and operational risk stay in IRB, so it's about the decision, and I cannot talk about the decision of the past. I will talk about the decisions coming in the future.

Next question from Nicolas Mora from Morgan Stanley. Can you help us better understand the shape of dividend distribution from the Infra vehicle, please?

As I said, the distributions will depend on performance and a decision of the Board. I cannot speak now about this and give guidance about dividend. Thank you.

Next question from Fernando Lafuente from Alantra. After this acquisition, could you please give us a reference on what is the remaining firepower of the company, assuming Heathrow disposal is closed, do you foresee any additional capital increase at the Infra Trust vehicle?

Fernando, this is Ernesto speaking. I mean we always refer the firepower of the company to around 2x net debt to EBITDA and the main component of the EBITDA would be the dividend from projects. So I mean, that is the firepower that we may have, okay? So just add that what you're saying that Heathrow disposal on top of that will give you the firepower. If we foresee any additional capital increase at the Infra Trust vehicle was -- and Andres mentioned that this vehicle is pretty much self-funded with the dividends from the projects. If this is not the case, we will have to assess it but that's the expectation. Thank you.

Thank you Andres, Ernesto. There are no further questions. Thank you.

Thank you all for attending this call. Have a great day.