3i India, the Indian arm of Europe?s largest listed private equity (PE) fund, which manages ?12.7 billion globally, recently announced the rollback of its second India focused PE fund due to adverse market conditions. However, the company?s head of Asia for growth capital, Anil Ahuja, says it?s business as usual for infrastructure investments in the country. In an exclusive interview, he tells Shruti Ambavat that if the infrastructure and power sectors are not able to provide sensible return on capital, there will be no fund inflow into the sector. Edited excerpts:
What impact will issues in India?s power sector have on PE firms?
Power is by far the largest sector for investments. Every PE investor is going to take a hit badly. The entire sector is in trouble. Various companies are at various stages of developing about 100,000 MW of power. This means at least R500,000 crore of investment. With so much investment, on a minimum level, you have Rs 350,000 crore of debt. We are a country that has abundant raw material but we cannot take it out of the ground and are importing it at five times the price from other countries. The two options government has are to generate the raw material or to revive the Power Purchase Agreements (PPAs). The trouble with the second option is that the minute you revive the PPAs, you are going to essentially pass through a higher cost burden through the entire electricity channel.
Do you think there is an solution to this crisis at hand?
The only solution is to tell Coal India to ramp up production. But they also have other issues to deal with like environmental approvals and regulations, among other issues. There is no point in the country generating 450 million tonnes of coal and expecting 250 million MW of power. If you want that much power, you need a billion tonnes of coal. That is 4 mt for every MW. India keeps saying they want to be China, but they can?t because you have power shortage.
What action do you see from the government that can address these issues?
I think the government will resort to the option of revising the PPA tariffs. The entire industry will pay higher prices and the end consumer will have to pay higher tariffs. A better solution would be to make raw material available. You need 13-14% of return to service your debt. To generate that much Ebitda you need input and output at a certain price. Otherwise, you have a non-sustainable sector. No investor has made a commitment to a power company in the last 12-18 months. And the impact will show up three years later.
The second India-focused fund that 3i was planning to launch but got canned had roads, railways and telecom tower companies as its new focus. Anything out of these that can be done through the existing fund?
The existing fund has clear mandates of investment in roads, ports, power and airports. There is nothing in airport left to be done and the existing ones are in a complete mess. Our existing portfolio will require capital incrementally, but there has to be a viable business model to back. Your variable cost of raw material is higher than your selling price.
Which sector do you think you can invest in then?
Roads are likely to see more investment.
As an investor, what should be the strategy now?
I don?t think that this time around, the investors are going to get excited just by the policies coming in. I think they are going to wait to see the impact of the policies. Nobody is otherwise going to take these policy changes seriously. The market is very poor. We have more than $300 million left to invest but hardly any deals.
You had plans for investment in telecom towers as well. You think they are viable for investments?
We have looked at all of them because we could earlier invest through the PE side. But we were not comfortable with the numbers. The problem with each one of them is that they need a certain number of tenants for tower to make it viable and cost of maintenance is high. And until the 2G scam is sorted out, it is a bigger mess.
