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Ascendas India Trust: The Bear Case

Ascendas India Trust (SGX:CY6U), as its name suggests, invests primarily in real estate in India. It owns IT business parks and modern warehouses in India’s prominent cities, including Mumbai and Bangalore.

In an earlier article here, I described why investors should consider investing in the trust. In this article, I will focus on the bear case and what are some of the risks.

High interest expense

Despite having a gearing ratio of just 26%, Ascendas India Trust still has a very high interest expense in comparison with its property income.

This is illustrated by its low interest cover ratio of just 3.6 times. The interest cover ratio is calculated by dividing the trust’s EBITDA (earnings before interest, taxes, depreciation, and amortisation) by its interest expense. A higher interest cover ratio is desirable as it means that the trust can increase its borrowings and still pay off any additional financial costs.

At just 3.6 times cover, Ascendas India Trust has one of the lowest interest coverage among REITs and property trusts in Singapore. Any disruptions to its cash flow or increase in interest rates will put significant pressure on the trust paying off its interest expense.

Foreign currency fluctuations

The Singapore dollar has appreciated nearly 50% against the Indian rupee since the trust’s listing in 2007. This certainly had a negative impact on distributions to unitholders.

With the Singapore currency continuing to see strong demand and the strong position of Singapore as a financial hub, it is possible that the Singapore dollar will continue to appreciate against the Indian rupee, further eroding distributions in the future.

Private placement

As an investor, I always look forward to equity fund raising that offers existing shareholders an opportunity to buy more shares in a company at a discount to average market prices.

However, private placements, on the hand, can have a negative impact on retail unitholders who do not have the same access to the new units as the privileged investors. The private placement in February, which was issued at a discount of 7% to the volume-weighted average price then, would have a dilutive impact on minority unitholders due to the enlarged unit base.

Lofty valuation

Lastly, at its current price of S$1.04 per share, the trust trades at a premium to its book value at 1.15 times and has a trailing distribution yield of 5.87%. This is below the average distribution yield of 6.5%.

The Foolish bottom line

Ascendas India Trust does certainly have tremendous upside potential. However, there are also specific risks and pitfalls that investors should be aware of. Hopefully, the two articles on Ascendas India Trust will give investors a better picture of both the pros and cons of investing in the trust.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned.