Ascendas India trust AR 2017

Ascends India trust AR 2017

High level summary
Straightforward rental business (REIT) in a fast growing country and industry. 

There is a strong business trend among US MNC banks to outsource their operations and IT services to India as the cost of the staff is very cost competitive. In fact, there are increasing manpower and staff count in India teams as the banks undergo cost restructuring. 

Due to the streamlining of GST, logistics industry in India is also another potential growth sector, as companies seek to consolidate their warehousing into specific hubs. 

Moat of the business

Not anyone can simply open shop next door and lure tenants to another location

Cheapest outsourcing destination allows the REIT to capture ever increasing market share. With improvement in technology, almost any work can be digitalised and sent to India for action. 

Utilise tenant engagement to keep the employees satisfied and result in supposcally lower employee attrition rate for the tenants. This leads to stickier tenants. (tenant retention rate 72%)

Lower energy expenditure due to use of solar power. 

PEST / SWOT
Politically, Modi is working towards economic reform and open towards attracting FDI and maintaining generally stability

Economic, one of the fastest growing economy. Cheap cost of labour will be attracting outsourcing of processes to the special economic reason I trust is located. 

Socially, the emerging group is trained in English (Lingua Franca). There might be prevalent weakness in the work culture and the attitude towards regulation and risks, but those can be trained up across time. 

Technology hub and top outsourcing hub of business and IT processes. Fast growing economy that is embracing digitalisation and strong emerging market. 

Porter 5 forces
Competitive rivalry
Nil at the moment as the REIT industry is at its infancy. Black stone may be setting up investment trusts to take advantage of this rapidly growing market 

Bargaining power of suppliers.
Government have strong negotiating power to set up new regulations that may affect the outlook. There is significant political risk in developing markets. 

Ascendas singbridge
There should be no issues as the interests of the sponsor and REIT manager are aligned (compensation in units). (Disregarding dilution in DPU with new issuance of units)

Bargaining power of customers.
Tenants have significant bargaining power. Although they may prefer setting up office at the buildings, there is possibility of uprooting to new rivals with better value proposition. Nonetheless, being located in special economic region, tenants may be stickier to the prevalent region. 

Threat of new entrants
Blackstone. May require monitoring of emerging entrants. 

Threat of substitute products or services
Office space is unlikely to face near time disruption. In fact, the market should be booming as long as India maintains cost advantage in the outsourcing business. 

Financial performance
Strong operating and financial performance 

Continual increasing net property revenue (increase 23%) compared to increase in total property expense (15%)

Continual increasing property income

Increasing DPU, through there might be continual dilution due to private placement and payment of trustee fees in units. Then again, choice of units rather than cash signify alignment of shareholder and management interest. 

Sharp increase in cash and equivalents. General decrease in inventories (improved cash cycle)

Sharp increase in current borrowings

Increase in retained earnings 

Increasing NAV

Gearing reduced due to recent private placement (29%=>26%), leading to increased debt headroom

Commuted occupancy 95%

Capex and depreciation expense (upkeep and upgrading facilities) relatively low compared to free cash flow and profit margin. 

Borrowing in mainly fixed interest rate. As SGD borrowing cost is lower, there is significant forex risk as managers borrow in SGD, use currency swap and return interest in INR. Exchange rate risk is managed via forward contracts and also Singapore managed float exchange rate policy. 

Financial Performance

Income Statement

Balance Sheet


Cash Flow statement


Financial statement review

Income statement

Expenses are kept relatively well in check compared to increase in revenue. Basic and diluted EPS /DPU has been improving steadily. EBITDA has been improving significantly.

Balance sheet
From balance sheet perspective, Net gearing has improved.
From real estate perspective, due to the freehold and 99 year leasehold nature of the land, the India growth story will lead to low capex of its existing architecture (newly built) , whereas it is holding on to significant plots of land that will generally appreciate over time.
CAPEX is very low leading to significant profit margin and high dividend payout.
Cash comprises of a large part of its balance sheet making it a safe asset play and the ability to meet short term liquidity constraints.
Adjusting of debt composition, tapering down of short term debt instruments in favour of long term debt instruments.
Significant increase in retained earnings for business purposes.

Cash flow statement
Operating Cash flow and Free cash flow is impressive and further improved due to private placement.
Quality of operating cash flow is robust and stable, and increasing steadily as it builds up its portfolio of architecture. As it is growing its portfolio, significant cash for investments is ploughed back to acquire warehouses and improve its existing utilisation of space. Exchange rate fluctuations is significant in affecting its performance.

Personal Comments

Corporate governance should not be a big issue as India has improved regulation in Trust law, and Temesek holdings has invested significantly into this India trust. Internal audit is outsourced to KPMG. Voluntarily adoption of REIT covenants to give unit-holders peace of mind. 

A simple, understandable and boring business is a big plus to me. Valuation is cheap compared to REIT equivalents.