Executive summary

The Indian infrastructure space has seen a significant turnaround in recent past with large global investor funds vying for equity and debt investment opportunities in this segment. To be sure, the domestic infrastructure sectors¹ have been able to attract over USD 74 billion² FDI investments in the past five years. These investments have been made by several marque global investors which include the likes of Blackstone, Brookfield, KKR, Macquarie, CDPQ and Canadian Pension Plan Investment Board.

So, what has changed in the Indian infrastructure segment that appeals large global investors?

Over the last decade, concerted effort has been made to address the issues plaguing various segments in the sector and thereby improve the risk perception. For instance, there is better risk sharing in the contracts awarded; concession agreements have been revised to address the bottlenecks that hampered the projects; and heightened role of central agencies as key stakeholders has improved operational performance and consequently investor confidence.

Besides, operational infrastructure projects inherently carry lower risks. The way this works, implementation risks decline once a project becomes operational, and the passive nature of these assets means there is minimal intervention to operate.

Then, long-term contracts ensure revenue stability and visibility. The introduction of infrastructure investment trusts (InvITs) is another positive that has seen most of the operational assets moving into more transparent structures, with lower leverage and better diversification resulting in improved credit risk profile.

Given these developments, it is high time for domestic bond market investors to increase the allocation towards infrastructure issuances.

As such, bond market investors typically look for stable, long-term investment options (pension and insurance account for 38% of the investments in the bond market). Thus, exposure to debt instruments of operational infrastructure assets fits the bill. What’s more, some of these instruments provide better risk-adjusted returns, too.

The impending merger of the HDFC twins (HDFC Bank and HDFC Ltd) by the end of next fiscal presents yet another opportunity as the group will rely more on low-cost deposits rather than debt from the capital markets. The bond market can seize this opportunity and contribute to the Indian infrastructure story.

¹ Communication services, transport, construction, and energy
² RBI annual report