Tuesday, November 9, 2010

Power most lucrative business in India currently: 3i Asia

A private equity deal was sealed between 3i Infrastructure Fund and GVK Energy Limited, an arm of GVK Power and Infrastructure Limited. GVK Power will be selling 21.1% stake of GVK Energy to 3i Infra to the tune of Rs 1,200 crore.

Anil Ahuja, Asia head at 3i Asia in an exclusive interview with CNBC-TV18 said that out of the Rs 1,200 crore, Rs 800 crore would be raised from the 3i India Infrastructure Fund. He added, "We are hopeful that the balance Rs 400 crore will come from one of the affiliated limited partners as in the investors who are invested in our fund."

Excerpts from Markets Midday on CNBC-TV18 Watch the full show »


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He also said the power sector was the best story to emerge from India. \"If there is one sector where you really don't have to worry about overall demand-supply, that is power.\" He sees India\'s power shortage at 80,000 to 100,000 megawatt and doesn\'t expect it to change for the next three-five years.

Below is a verbatim transcript of his interview with CNBC-TV18's Sonia Shenoy and Gautam Broker. Also watch the accompanying video.

Q: If you can tell us more about this deal, how are you planning to fund this 21% stake, and how much will the entity 3i Group really shell out?

A: The total transaction is about Rs 1,200 crore and of the Rs 1,200 crore, Rs 800 crore is coming from the 3i India Infrastructure Fund and we are hopeful that the balance Rs 400 crore will come from one of the affiliated limited partners as in the investors who are invested in our fund. That is where the transaction stands right now.

Q: The deal value of about Rs 1,200 crore for 21% clearly implies that you are confident about GVK's future pipeline as well. Are you confident that the government will allocate gas to future power projects of GVK Power and also are there no other regulatory risks for an investment like yours?

A: There is no way we can be confident about what the government will do, but we have our expectations on what is likely to happen and that has been built into the deals structure.

Q: If I am not mistaken, you already have an exposure in the entire power and energy business with about 7.5% stake in Adani Power as well. How lucrative do you think this sector really is going forward in terms of both execution and what the government might deliver as the infrastructure for that execution?

A: The overall story for power remains probably the best story in the country today. If there is one sector where you really don't have to worry about overall demand-supply, that is power. If you look at 2012, we are talking about a gap which is at least 80,000 to a 100,000 megawatt and those are very large numbers. We don't see those numbers coming up anytime soon. We think that India will remain short at least for the next three-five years going forward.

The GVK story is a very interesting one from our perspective. This is genuinely a balanced portfolio and balanced on multiple fronts. It's balanced on the development of the portfolio that is 900 megawatt producing, approximately 900 megawatt in construction right now and about 2,200 megawatt in the greenfield.

On the other hand, if you look at the split on the source of the fuel, you have got a very good dispersion across hydro, gas and coal. You have got a great dispersion across the states where it is selling. You have got Andhra Pradesh, Punjab and Uttar Pradesh which are all deficit states. You have got a couple of coal mines in the mix which basically gives it incremental fuel security.

When you look at this overall pool, you think of this as an extremely well balanced portfolio of power assets. GVK group is a very high quality implementer of infrastructure projects in India so I see no reason why we should have any significant concerns about these 4,000 megawatt coming on-stream.

Q: What about the other sectors that you might be bullish on in India and also valuations? Have promoter expectations moved higher after the moves we have seen in the secondary markets?

A: 100%. Promoter expectations are now bordering on the edge of the bubbles. I hope some promoters are listening to this.

Q: Tell us about how much you plan to invest in other funds like this? What is the kind of pipeline that you are looking at by the end of FY12?

A: Our pipeline is very strong. Let's not worry about FY12, let's worry about the end of November and we will speak again soon.

Q: There has been so much money floating around in secondary markets. Do you think there is any possibility of a correction in the near future?

A: I have no answer to that one. I am personally getting quite concerned at the amount of money that is floating around. I am also quite concerned about the amount of money that is flowing into India from the developed world.

You cannot continue to have these levels of unemployment and job insecurity and expect the markets to keep going up. Forget about the Indian market which at least we can rationalize. You start to rationalize why is the Dow going up everyday and that starts to really put questions as to where is this bull run really coming from.

Again, taking a completely disconnected piece of information for the first time, we are starting to see freight utilization go down and this is after almost a continuous four month run one-way and these are early indicators of a slowdown from Asia to the West in terms of the total amount of exports and the total amount of trade and these are early signs that all is not well with the world.

Q: Where do you think we are going to end up with all of this liquidity? Do you think that the market would disregard all of the macro information and still continue to buy into equities because there is no other alternative?

A: I think you are giving too much credit or too much intelligence to the fund managers. I don't think fund managers use that much intellect. What is going to happen is one fine morning, something is going to go astray and people are going to turn around and say - this is exactly what happened two years ago.

I don't think we had fundamental problems in Indian companies but we had a huge sucking out of liquidity from the Indian markets because somebody in the US wakes up and says, "Oh, how is that I have so much exposure to emerging markets, I need to be in safer territories." So suddenly there is this withdrawal of capital.

When the withdrawal of capital happens it hits on multiple fronts. It hits on the currency as well as it hits on the values. So that is a double whammy for any foreign investor at that point in time. Fortunately for us, we are medium to long-term investors so we don't have a six month or a 12 month view on this. We are looking at three-five years and we are quite comfortable with some of the stocks that we are entering into right now. But overall, yes it is looking quite heady

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