The stress in the infra space, where companies are highly leveraged and banks overloaded, isn?t going away soon, but Rajiv Lall, executive chairman, IDFC, believes there are some bright spots. Mumbai, for instance, seems to be getting its act together and with some pragmatism a couple of large highway projects, he feels, can be resurrected. Lall tells Shobhana Subramanian IDFC has the potential to become a profitable bank in seven or eight years; it shouldn?t be too difficult, he says, to convert the wholesale liabilities into CASA.
How do we lighten the load that banks are carrying in terms of infra loans?
Notwithstanding the asset-liability mismatch, a lot of the heavy lifting for financing infra has been done by the banks. Because of this, market practice has been to keep the maturity of these loans on the shorter side relative to the length of the concession; so if you have a 20-year concession banks have, as part of the underwriting process, made sure the loan is amortised over 10 years. There are now instances where, in the sixth or seventh year of the loan, the client says he wants the loan refinanced, but if banks do this, RBI calls this restructuring. We?ve been arguing against that because if a client can spread the residual loan over another 10 years the cash flow burden comes down and the return on equity increases. Since the sector is hurting and there are a limited number of financial instruments, can we not allow this kind of refinancing and not call it restructuring? We believe RBI is thinking about this and becoming more nuanced.
Is it a concern that most infra players are so highly leveraged?
The people who have gotten into trouble are the ones that have used debt, at the level of the parent, to finance their equity obligations at the level of the projects. And there could be a fair number of those. Even if the parent?s cash flows are, say, only R100, and there is debt of R5,000 in various projects, it is fine as long as the equity requirements are fully funded.
Several companies are trying to sell assets but so far there don?t seem to be too many takers?
Companies have to sell because they have to improve their capital structure. And the reason no deals are happening is because they are asking for unreasonable prices, which nobody wants to pay; it is a negotiation tactic. The buyer is smelling blood and the seller is holding on. There are takers, both foreign and Indian. But prices need to fall and sellers need to become more reasonable.
What do you make of a GMR Infra walking out of the Ahmedabad-Kishangarh-Udaipur highway?
We have a similar problem in other sectors. Given how the price of imported coal from Indonesia has gone up, the Tatas or the Adanis may walk out of their power projects, though they will have to pay the penalty. I guess we have to decide, and it is not an easy decision, whether in an environment where everything is stuck, we should restructure the terms of the agreement or not. If you ask the NHAI, they will tell you that the net present value, over the life of the project, at some discount rate, remains the same. So, in an NPV sense, you are not changing anything, but in a cash flow sense, you have made life easier for the concessionaire. You could argue that this was not envisaged in the original build and it is an ex post distortion of the bid and, therefore, patently unfair to other bidders, but even for that NHAI has an answer. They say this should be offered to whoever else is willing to take over the project. A restructuring of the premium should be allowed with a mechanism to see there?s no litigation from someone who might feel aggrieved. If an L2 wants to match, so be it, but my sense is no one will.
What do you make of the easier exits being allowed to concessionaires?
One of our learnings is that the original capital in project development is not usually interested in staying the course. It is the quick turnaround, risk-taking, swashbuckling type of entrepreneurial mindset. The type of capital that is required to stay with the concessionaire over a long period of time is lower risk more focused on operations and more long-term oriented. And since the second type of capital is not comfortable developing the asset in a colourful country such as ours, presumably the sensible solution is to also allow the first type of animal to take the big risk early on, build the project, provided he is then replaced by serious long-term investors with the appetite to stay the course. There is such a class of investors. We have raised a billion dollars in our project equity fund and are about to announce another $700 million.
Why would anyone buy a power plant knowing there is not enough coal or gas to run it?
There are people who might take the bet that it is a matter of time before gas becomes available and they would be willing to sit on the asset, provided it comes cheap enough, in the belief that in 3-4 years from now it could be very valuable. We could buy an asset like that; it is a calculated bet because any plant is viable at an appropriate tariff. A big change that needs to happen in the next 4-5 years is that people need to realise the cost of energy is going up; the sooner they get their heads around that the better. We have to come to a decision on whether or not we are willing to pay for cleaner energy.
Given how leveraged the current crop of infra players is and how small the chances of raising equity are, who is going to build the next round of infrastructure projects?
That is a big problem. There is no doubt that the ability of the current lot of infra players to initiate new ventures has been set back by about 3-4 years. So, it is not clear who will build the next set of projects and I have been saying that for the longest time. We will muddle through all our existing problems, we will fix it, band-aid it, banks will swallow some losses, investors will take some hits, we will eventually, I hope, salvage a good chunk of the investments made. But it has so compromised people?s confidence in the future that I don?t have any clarity on who will now step up to build the next wave of assets. At the same time, let?s also not underestimate our swashbucklers; in 3-4 years when their balance sheets are fixed, they may bounce back.
In some cases, the cash flows for gas-based power plants are likely to become smaller because of the unavailability of gas?
It is absolutely true that the around 15,000 MW of new gas capacity is stranded, that just has to be restructured ? there?s some $10-12 billion of debt right there and it is a big problem. We have to produce gas or we have to find some political accommodation to allow these people to sell peaking gas. Or we have to force open access so that people who are willing to pay higher costs for energy be allowed to pay and directly access energy. In the political order of things, if the R60,000 crore is disproportionately held by private banks and a few large state-owned banks, it will be easier to recapitalise a state-owned bank, than to fight with 29 states and say you need to pay a higher price for energy because I need to save so many gas plants and the gas is needed for fertiliser plants. It is the private banks that will hurt.
There?s not been a single bid for the Mumbai trans-harbour link?
That?s true; perhaps the MMRDA will build it. But somehow I?m quite optimistic that Mumbai will get its infrastructure, there?s a lot more happening than people give the city credit for. There are expressways being built, the metros are coming up, there?s the elevated railway and the Navi Mumbai airport will be finished now that it?s got the environment clearance. The chief minister is talking about the 112-km road corridor from Alibaug to the northern tip of the metropolitan region; they?ve started the land acquisition. MMRDA has done a creditable job in Mumbai.
What do you think the DMRC should do now that Reliance Infra has walked out of Delhi Airport Express project?
I don?t have an answer to this other than these are disputes of various kinds and there are only two ways of solving them. One way is to go through the legal mechanism of dispute resolution and keep struggling with the time it takes to get anything past our legal system, arbitration, appeals and courts. The other is to find different mechanisms, like a renegotiation committee. These are pragmatic solutions but they imply a compromise that everybody is happy with, so that nobody then wants to litigate.
Do you think private players have too little skin in the game?
They always try to get away with as little as possible. But, as lenders, we ensure they have a minimum contribution, in terms of the equity. A 30% equity should be fine, in tough times you could take it up to 40%. Sometimes I think we have made mistakes in that we haven?t seen through where his equity contribution is coming from, whether he has leveraged to bring in that equity.
Are IDFs about to take off?
For the equity owner in an IDF-NBFC, the returns are not compelling and the exit too is an issue. The spread to the equity owner is barely 100 basis points after paying an appropriate return to whoever is lending to the IDF. The lender could make around 8-9% depending on the cost of hedging. While FII debt inflows have slowed down, the theory of higher interest rates is that you should, at a certain interest rate and a suitably depreciated currency, attract a significant amount of debt flows since the calculation is that the higher yield will more than compensate for the future fall in the currency. That is the bet behind the RBI intervention. If they are able to convince the markets that at the levels of 61-62 the likelihood of further erosion in the currency is low, then it becomes a virtuous cycle.
IDFC is keen to get a bank licence?
It makes sense for us to be a bank, it?s hard work but we believe we can get the CASA if we deliver quality service. The deregulation of interest rates on savings accounts has been a benefit to smaller banks; look at how some of them have weaned away deposits from larger banks. And if we are able to substitute our liabilities, from whatever current sources to CASA, over 5-6 years we can be a profitable bank, at an ROE that will be remunerative to shareholders and comparable to those of the better private sector banks. While the loan market is competitive in cities, outside of the cities there is an opportunity. It?s a 7- or 8-year haul but it?s possible to do it.