Disclaimer: Education only, not investment advice or a valuation of any real InvIT. All numbers are hypothetical. Figures are as of the date shown at the end of the page.
In simple words (if you are in class 10)
Suppose a friend offers you a deal: "Give me ₹100 today, and I'll give you ₹12 every year for 15 years. After that, nothing."
₹12 on ₹100 sounds like 12% a year. But wait: at the end you get nothing back. Your ₹100 is gone. Part of every ₹12 was really your own ₹100 being returned slowly. If you work out the true yearly return, it is only about 8.4%, not 12%.
If the deal ran for only 10 years, the true return would be about 3.5%. If it ran 20 years, about 10.3%.
That is the most important idea in valuing a toll-road InvIT: the road is returned to the government at the end, so the number of years left matters enormously.
The professional view
1. Distribution yield vs IRR
| Payout per ₹100 | Years of payout | Value at end | IRR |
|---|---|---|---|
| ₹12 a year | 10 | 0 | 3.5% |
| ₹12 a year | 15 | 0 | 8.4% |
| ₹12 a year | 20 | 0 | 10.3% |
(Computed with a standard IRR function; payments at year end.) Try your own numbers in the InvIT return calculator.
Lesson: compare InvITs on expected IRR over the remaining asset life, not trailing distribution yield. A diversified InvIT that keeps buying new assets behaves more like a perpetuity; a closed portfolio of ageing concessions behaves like a self-liquidating annuity.
2. DCF for a finite-life concession
There is no terminal value for a toll concession (unless an extension is contractually likely). Value = present value of free cash flows to the end of the concession, plus any hand-back or termination receipts.
Worked example (hypothetical SPV, 10 years left, no debt, tax ignored for simplicity):
- Year 1 toll revenue ₹100 crore, growing 6% a year (traffic plus toll revision)
- O&M 15% of revenue
- Major maintenance ₹40 crore in year 5
- Discount rate 10%
| Year | Revenue | O&M | MM | Free cash flow |
|---|---|---|---|---|
| 1 | 100.0 | 15.0 | 0 | 85.0 |
| 2 | 106.0 | 15.9 | 0 | 90.1 |
| 3 | 112.4 | 16.9 | 0 | 95.5 |
| 4 | 119.1 | 17.9 | 0 | 101.2 |
| 5 | 126.2 | 18.9 | 40 | 67.3 |
| 6 | 133.8 | 20.1 | 0 | 113.7 |
| 7 | 141.9 | 21.3 | 0 | 120.6 |
| 8 | 150.4 | 22.6 | 0 | 127.8 |
| 9 | 159.4 | 23.9 | 0 | 135.5 |
| 10 | 168.9 | 25.3 | 0 | 143.6 |
Enterprise value ≈ ₹633 crore.
Sensitivities: discount rate 11% → ₹604 crore (−4.6%); revenue growth 5% → ₹608 crore (−4.0%). Real models also add tax, working capital, debt service, reserve movements, and traffic scenarios.
3. Choosing the discount rate
- Cost of equity for an InvIT is typically built from the government bond yield plus a premium for traffic risk, leverage and liquidity. Toll (traffic-risk) assets usually command a higher premium than HAM/annuity assets with a government counterparty.
- WACC vs FCFE: with project debt at SPV level, either value the enterprise at WACC and subtract net debt, or discount equity cash flows at cost of equity. Be consistent: debt sculpted to cash flows changes leverage every year, which makes a constant WACC an approximation.
- Valuer disclosures in InvIT valuation reports state the discount rates used; read them alongside traffic assumptions. Valuers are registered valuers under the InvIT Regulations.
4. NAV per unit
NAV = Fair value of InvIT assets (enterprise value of SPVs + other assets)
− consolidated borrowings and other liabilities
NAV per unit = NAV ÷ units outstanding
Listed InvITs often trade at a premium or discount to NAV, reflecting the market's own view of discount rates, traffic, governance and expected acquisitions.
5. NDCF: the cash that must be distributed
SEBI standardised the computation of net distributable cash flows with circulars dated 6 December 2023, effective 1 April 2024 (Taxmann; NSE copy). NDCF is computed at SPV/HoldCo level and at InvIT level, and at least 90% must be distributed on a cumulative basis over the financial year. The exact line items are in the circular; the outline below is illustrative and simplified, not the SEBI format; use the circular's own line items for any real computation.
SPV level (illustrative):
| Line | ₹ crore |
|---|---|
| Cash flow from operating activities | 120 |
| Less: capex and major maintenance paid (not funded by debt/reserves) | (10) |
| Less: interest paid to external lenders | (20) |
| Less: scheduled principal repaid to external lenders | (15) |
| Less: reserves required by lenders or law (e.g. DSRA top-up) | (5) |
| SPV NDCF | 70 |
| Minimum to distribute (90%) | 63 |
The SPV pays the InvIT the ₹70 as interest on the InvIT's shareholder loan, repayment of that loan, and dividend.
InvIT level (illustrative):
| Line | ₹ crore |
|---|---|
| Cash received from SPVs (interest, repayment, dividend) | 70 |
| Less: InvIT expenses (manager fee, trustee, valuation, listing) | (2) |
| Less: InvIT-level interest and scheduled principal | (8) |
| InvIT NDCF | 60 |
| Minimum to distribute (90%) | 54 |
Use the InvIT NDCF statement template to practise.
6. TOT bid valuation in one paragraph
A TOT bidder values the toll stream for the concession period (30 years in early bundles), deducts O&M, MM and tax, and solves for the upfront fee that yields its target equity IRR given an acquisition debt structure. The gap between NHAI's base price and the winning bid in TOT Bundle 1 (₹6,258 crore vs ₹9,681 crore; Cyril Amarchand Mangaldas) shows how sensitive value is to the bidder's traffic and discount-rate assumptions. See the TOT concession valuation template.
7. What a valuation reviewer challenges
- Traffic growth vs history and vs the independent traffic study; the base year after any disruption.
- WPI assumption and the 40% pass-through (see Part 6).
- MM cost and timing, and whether reserves already funded are counted twice.
- Concession end date, extensions assumed, and hand-back costs.
- Tax: SPV regime, loss carry-forward, MAT credit.
- Discount rate consistency with leverage and risk; comparison to recent transactions.
- Circularity: valuation feeds leverage ratio, which feeds borrowing capacity and acquisitions.
Key takeaways
- A toll concession is a finite annuity: yield includes return of capital.
- DCF without terminal value; small changes in growth and discount rate move value by several percent.
- NDCF is the regulated cash measure for distributions; NAV is the valuation measure.
Sources
- SEBI NDCF circulars of 6 Dec 2023 (summary and NSE copy): linked above
- SEBI InvIT Regulations, 2014: https://www.sebi.gov.in/sebi_data/docfiles/29273_t.html
- Cyril Amarchand Mangaldas on TOT Bundle 1: linked above
Previous: Part 6 · Next: Part 8: Ind AS accounting for InvITs and toll roads
Education only. This page is not investment, tax, legal or accounting advice, and it does not recommend buying, selling or holding any security. Laws and rules change: check the linked primary source and consult a qualified professional before acting.
Last reviewed 25 October 2026. Spotted an error? Tell us and we will correct it.