IRB InvIT Fund Q2 FY26: Profitability Dips Despite Stable Toll Revenue

The infrastructure investment trust's Q2 FY26 performance reveals a concerning trend of sequential profit erosion despite maintaining its core operational efficiency. Whilst toll revenue declined modestly by 4.86% QoQ to ₹276.60 crores, the net profit contraction of 16.93% signals margin pressure beyond just top-line weakness. The trust's PAT margin compressed significantly from 34.26% in Q1 FY26 to 29.91% in Q2 FY26, a decline of 435 basis points that warrants careful scrutiny from unitholders.

On a year-on-year basis, revenue growth of 2.42% appears anaemic for an infrastructure asset class typically characterised by inflation-linked toll escalations and traffic volume growth. The modest 3.05% decline in net profit YoY, whilst less severe than the quarterly contraction, indicates that profitability challenges are not merely seasonal but potentially structural in nature.

Financial Performance: Margin Erosion Overshadows Stable Operations

IRB InvIT Fund's Q2 FY26 financial performance presents a mixed narrative where operational stability at the toll collection level contrasts sharply with profitability challenges downstream. Revenue from operations stood at ₹276.60 crores, declining 4.86% QoQ from ₹290.74 crores in Q1 FY26, but showing a modest 2.42% YoY improvement over ₹270.06 crores in Q2 FY25. This sequential dip likely reflects seasonal traffic variations and potentially lower-than-expected toll realisations during the monsoon quarter.

The trust's operating profit before depreciation, interest, and tax (PBDIT) excluding other income stood at ₹231.56 crores in Q2 FY26, maintaining an impressive operating margin of 83.72%. Whilst this represents a marginal 42-basis-point compression from Q1 FY26's 84.14%, it underscores the inherently high-margin nature of toll road assets with minimal variable costs. However, the devil lies in the details below the operating line.

Interest costs remained elevated at ₹72.63 crores in Q2 FY26, virtually unchanged from ₹72.50 crores in Q1 FY26, reflecting the trust's substantial debt burden of ₹3,129.12 crores as of March 2025. Depreciation charges increased to ₹71.61 crores from ₹70.61 crores, adding to the profit squeeze. The combination of stable but high interest costs and rising depreciation resulted in profit before tax declining to ₹88.65 crores in Q2 FY26 from ₹103.07 crores in Q1 FY26, a sharp 14.00% QoQ contraction.

The final net profit of ₹82.74 crores represents a PAT margin of 29.91%, down from 34.26% in the previous quarter. This 435-basis-point margin compression is concerning and suggests that the trust is facing challenges in translating operational efficiency into bottom-line profitability. The quality of earnings remains reasonable given the cash-generative nature of toll assets, but the sequential deterioration merits close monitoring.

Capital Efficiency Concerns: Weak Returns on Equity

One of the most significant red flags for IRB InvIT Fund lies in its weak capital efficiency metrics. The trust's average return on equity (ROE) stands at a disappointing 6.93%, whilst its latest ROE for FY25 improved marginally to 9.34%. For context, these returns are substantially below the 15-18% ROE benchmarks typically expected from quality infrastructure assets and significantly trail peer performance in the construction and infrastructure sector.

The average return on capital employed (ROCE) of 7.20%, with the latest figure at 9.88%, paints a similar picture of suboptimal capital productivity. These weak returns reflect the trust's high leverage (net debt-to-equity of 0.73x) combined with modest operating profitability. With fixed assets of ₹10,203.20 crores as of March 2025 and shareholder funds of ₹3,806.88 crores, the trust's capital structure is heavily tilted towards debt financing, magnifying the impact of interest costs on profitability.

The trust's balance sheet reveals negative reserves and surplus of ₹941.61 crores as of March 2025, highlighting the accumulated losses and distribution payouts that have eroded net worth over time. Whilst this is not uncommon for InvIT structures designed to distribute cash flows rather than retain earnings, it underscores the importance of consistent operational performance to justify unitholder distributions.

Long-Term Growth Challenges: Declining Sales Trajectory

Perhaps the most concerning aspect of IRB InvIT Fund's financial profile is its negative five-year sales growth of -2.40%. This secular decline in revenue generation capability is highly unusual for toll road assets, which typically benefit from inflation-linked toll increases and gradual traffic volume growth. The trust's revenue has declined from ₹1,240 crores in FY20 to ₹1,084 crores in FY25, representing a compound annual decline that raises questions about the underlying traffic trends and toll realisation capabilities of the portfolio assets.

Whilst EBIT growth of 15.79% over five years appears positive, this improvement has come primarily from cost rationalisation rather than top-line expansion. Operating margins have improved from 80.1% in FY20 to 82.1% in FY25, but this incremental efficiency gain cannot compensate for the structural revenue challenges. The trust's inability to grow revenues in line with inflation and economic activity suggests either traffic volume pressures on specific road assets or challenges in implementing toll escalations effectively.

Peer Comparison: Lagging Industry Performance

When benchmarked against construction and infrastructure peers, IRB InvIT Fund's relative positioning reveals significant underperformance across key financial metrics. The trust's ROE of 6.93% trails substantially behind peers such as Rites (18.02%), Engineers India (17.46%), and G R Infraprojects (16.69%). Even NCC, with an ROE of 9.31%, outperforms IRB InvIT Fund, highlighting the trust's struggle to generate competitive returns on equity capital.

The trust's P/E ratio of 21.29x appears reasonable relative to peers, trading at a discount to Rites (28.81x) and Engineers India (20.29x), but at a premium to NCC (14.55x) and G R Infraprojects (10.01x). However, this valuation multiple must be viewed in the context of IRB InvIT Fund's significantly weaker ROE profile. Investors are effectively paying 21 times earnings for a business generating sub-7% returns on equity, which represents poor value proposition compared to peers delivering 15-18% ROE at similar or lower multiples.

The price-to-book ratio of 2.05x also appears elevated given the weak return profile. Typically, companies trading above 2x book value should demonstrate ROE in excess of 15% to justify such premiums. IRB InvIT Fund's P/BV multiple is higher than NCC (1.53x) and G R Infraprojects (1.28x), both of which generate superior returns on equity, highlighting a valuation disconnect.

Valuation Analysis: Premium Pricing for Subpar Returns

IRB InvIT Fund's current valuation appears stretched across multiple parameters, with the trust graded as "Very Expensive" by proprietary valuation metrics. At a P/E ratio of 21.29x, the trust trades at a discount to the construction sector average P/E of 35x, but this sector comparison is somewhat misleading given that many construction companies are in a different growth trajectory than mature toll road assets.

The EV/EBITDA multiple of 11.38x and EV/EBIT multiple of 16.00x reflect the market's recognition of the trust's stable cash flow profile, but these multiples appear rich when juxtaposed against the weak growth trajectory and declining revenue base. Infrastructure assets with negative five-year revenue growth typically command single-digit EV/EBITDA multiples, suggesting that IRB InvIT Fund's current valuation embeds optimistic assumptions about future traffic recovery and toll realisation improvements.

The trust's 52-week trading range of ₹49.95 to ₹67.00 shows significant volatility, with the current price of ₹60.95 positioned 9.03% below the high and 22.02% above the low. This price action reflects ongoing investor uncertainty about the trust's ability to deliver consistent distribution yields and capital appreciation. The absence of a clearly defined dividend yield metric in the current reporting period adds to the uncertainty, though historical distributions of ₹1.02 per unit suggest a modest yield profile at current valuations.

Shareholding Pattern: Institutional Exodus Signals Concerns

The shareholding pattern for IRB InvIT Fund reveals a troubling trend of institutional investor exodus that should concern potential investors. Foreign institutional investor (FII) holdings have declined consistently over the past five quarters, falling from 48.63% in June 2024 to 44.14% in June 2025, representing a cumulative reduction of 449 basis points. This sustained selling by sophisticated foreign investors typically signals deteriorating confidence in the trust's growth prospects and distribution sustainability.

Mutual fund holdings have shown marginal improvement, rising from 5.47% in June 2024 to 6.84% in June 2025, with a notable 149-basis-point increase in the most recent quarter. However, this increase appears insufficient to offset the larger FII exodus and may reflect tactical positioning rather than long-term conviction. Insurance company holdings have remained flat at 2.14% throughout the period, suggesting neither enthusiasm nor concern from this investor category.

Promoter holdings have remained remarkably stable around 18.52-18.56%, indicating no significant buying or selling activity from the sponsor. The absence of promoter buying despite the trust's weak stock performance and "sell" rating suggests that even insiders may not view current levels as particularly attractive. Non-institutional holdings have fluctuated between 48.95% and 50.62%, with the most recent quarter showing a decline to 49.84%, indicating retail investor caution as well.

Stock Performance: Underperformance Across Timeframes

IRB InvIT Fund's stock performance has been disappointing across most timeframes, significantly underperforming both the Sensex benchmark and its construction sector peers. Over the past year, the stock has delivered a meagre 5.03% return compared to the Sensex's 9.00% gain, resulting in negative alpha of -3.97%. This underperformance becomes more pronounced over longer periods, with three-year returns of -1.53% against the Sensex's 37.22% surge, translating to a staggering negative alpha of -38.75%.

The only bright spot in the performance matrix is the six-month return of 12.60%, which generated positive alpha of 8.63% against the Sensex. However, this recent outperformance appears to be a temporary reprieve rather than a sustainable trend reversal, as the subsequent one-month and three-month returns have turned negative again. The stock's beta of 1.35 indicates higher volatility than the broader market, classifying it as a "high beta" stock that amplifies both gains and losses relative to benchmark movements.

Compared to its construction sector peers, IRB InvIT Fund has significantly outperformed, with the sector delivering negative returns of -19.82% over the past year. This 24.85% outperformance versus the sector reflects the relative defensive characteristics of toll road assets compared to pure-play construction companies, but offers little consolation to investors who could have achieved better returns in the broader market.

Investment Thesis: Weak Fundamentals Trump Defensive Characteristics

The investment thesis for IRB InvIT Fund rests on shaky foundations despite the inherent defensive characteristics of toll road assets. The trust's proprietary Mojo score of 37 out of 100 places it firmly in "SELL" territory, reflecting the confluence of weak quality metrics, expensive valuation, and flat financial trends. The four-pillar assessment reveals concerning weaknesses across multiple dimensions that are difficult to overlook.

From a valuation perspective, the trust's "Very Expensive" grading reflects P/E and P/BV multiples that appear unjustified given the weak return profile and negative revenue growth trajectory. Quality metrics paint an equally concerning picture, with the trust graded "Below Average" based on its sub-7% ROE, declining sales growth of -2.40% over five years, and tight interest coverage of 2.39x. These fundamental weaknesses suggest that the trust is struggling to create value for unitholders despite the stable nature of its underlying toll road assets.

The financial trend classification of "Flat" accurately captures the stagnant performance, with quarterly PAT showing volatility but no clear upward trajectory. The only positive element in the assessment is the "Mildly Bullish" technical trend, which provides some near-term trading support but offers little comfort for long-term investors focused on fundamentals and distribution yields.

Outlook: What to Watch

For investors monitoring IRB InvIT Fund, several key indicators will determine whether the trust can reverse its current trajectory or faces further deterioration. On the positive side, any signs of traffic volume recovery, successful implementation of toll escalations, or margin improvement would provide support for the investment case. Debt reduction through asset monetisation or refinancing at lower rates could also improve return metrics and distribution capacity.

Conversely, red flags to watch include continued quarter-on-quarter profit declines, further institutional investor exodus, compression in distribution yields, or any covenant breaches on the trust's substantial debt burden. Failure to achieve revenue growth in line with inflation would also signal ongoing structural challenges in the underlying toll road portfolio that could necessitate downward revisions to fair value estimates.