It seems controllable and uncontrollable factors have converged on the infrastructure sector, causing lenders and investors to step back in their plans. Ranjit Manjarekar, COO Infrastructure Finance, Tata Capital, tells Infrastructure Today that lack of visibility of returns, stemming from uncertainties, is a big dampener, but tells us how his firm is manoeuvring around the roadblocks to identify the right segments to go after.
Tata Capital has a 10 per cent share of the market in financing of construction equipment and refinancing of used equipment. Tata also finances infrastructure projects in roads, rail, warehousing and power.
Do you believe that the infrastructure growth story´s potential is far greater than what the current gridlock indicates?
After recording a CAGR of about 20 per cent over 2008-09 to 2011-12, growth in revenues of construction companies has slowed to about 7 per cent in 2012-13, mainly due to delays in sectoral clearances across various sectors of Infrastructure. A weaker financial profile has also limited companies´ ability to borrow additional funds and execute BOT projects on time. This situation will continue to hamper the industry´s execution levels through 2013-14. This, coupled with a weak macroeconomic environment, is expected to further mute the industry´s revenues during the year.
Do you think some policy measures can fuel the growth? Which sectors within infrastructure do you believe specifically need impetus?
The sector is in dire need of strong regulatory and policy actions to improve the financial health and functioning of state distribution companies and policies for streamlining and expediting fuel availability apart from cost escalation mechanisms and environmental clearances.
In the current environment, several segments of infrastructure need focus. The entire sector is in dire need of infusion of capital which is possible only through policy measures enabling ease of transfer of assets and trading of assets which would result in equity unlocking of current players. Funding policies need to be benchmarked against global players.
The returns from the power sector are expected to come down due to rising interest rates and increase in fuel costs. Moreover, the availability and pricing of fuel (coal and gas) is a major concern. There are difficulties in project execution as several players face hurdles in land acquisition. State utilities, saddled with accumulated losses of over Rs 1 trillion and an eroded net worth, are curtailing offtake to avoid further deterioration of their financial health. On the other hand, urban infrastructure has emerged as an attractive sector for private investments. The resolution of policy issues relating to toll policy, exit clause and ambiguity in model concession agreements (MCAs) are added positives. Moreover, execution or input risk is limited as 80 per cent of the land is acquired by the government before the contract is awarded.
Cleantech (green technology including wind and solar) is emerging as another focus area for private investments.
Fund and finance options seem to have dried up for infrastructure sector. Do you believe this will correct itself in the near future?
The Planning Commission of India has set a cumulative target of $1 trillion (at 2006-07 prices) for investments in infrastructure over the 12th Five Year Plan period (FY2013-17). There is a deficit of investment of around Rs 5 lakh crore ($1,250 million at 2006-07 rates).
The government has put into effect various schemes to facilitate funding like take-out financing through IIFCL, mobilised long term funds like tax-free bonds, Infrastructure Debt Funds (IDFs), etc.
However, due to high NPAs and debt restructuring as well as almost reaching their internal caps in lending to infrastructure sectors, public sector banks will have many constraints in lending to the infrastructure sector.
Currently, financing companies are also very selective in funding infra projects. What problems do lending firms face?
The main issue is that infrastructure players are currently unable to infuse capital; there are cost and project overruns because of various factors including delays n receiving clearances, and sharp fluctuations in foreign currency. The issues also arise because of stringent guidelines for recognising NPAs and possibility of restructuring.
What is the recourse in the long run?
In this environment, cost overrun challenges or delays other project clearances. High cost of funds is causing finance companies to be very selective in lending to infrastructure projects. However, we believe that the scenario will be considerably brighter in the long term.
A strong infrastructure base is imperative for achieving the targeted growth rates. We therefore believe that in order to meet its stated growth agenda, the government will take the necessary steps to resolve the issues that are hampering infrastructure investments. Discussions are being held at various levels between the government and the regulators on the policy actions required. The government has constituted an Empowered Group of Ministers to help clear bottlenecks in the sector. There is also talk of a unified regulator for the infrastructure sector.
We expect the government to carry forward reforms in the power sector with respect to equity infusion and reducing debt levels of State Electricity Boards (SEBs), facilitating investments in distribution, and increasing private participation. All this should be in addition to improving collection efficiencies and preventing theft of electricity. We also believe the government will expedite the legislation of the Land Acquisition Act, which will benefit all the infrastructure sectors.
We believe the government will enable flow of foreign debt funds, take out financing and facilitate development of the corporate bond market. The cost of funds, a major input for the sector, is also expected to moderate from the current levels over the medium term and facilitate revival of investments. Hence, we expect the pace of growth to pick up over the medium to long term as the prevailing hurdles are overcome and lending gains momentum again.
How do you find the sentiments of infrastructure companies?
Sentiments are down given the present economic scenario. Lack of clear visibility of cash flows from existing projects, delays in completion, and policy parameters are further weakening the sentiment.
However, since this is a core sector, we are positive that government will take appropriate action and the present hurdles will get sorted out in the long term.
Do you think lending exposure to the power sector is stressed?
Even though power sector is facing many input and clearance related issues, we expect these issues to be resolved soon. Many NBFCs and banks have financed conventional and renewable energy projects. Power Finance Corporation (PFC), Rural Electrification Corporation Ltd (REC), Industrial Finance Corporation of India (IFCI), and Infrastructure Development Finance Co Ltd (IDFC), and Indian Renewable Energy Development Authority (IREDA) have provided finance to the sector.
Will Tata Capital´s infrastructure portfolio continue its emphasis on lending to the construction equipment segment?
We have financed projects across infrastructure. Our maximum exposure is in urban infrastructure, followed by renewable energy. We have made subsequent investments in wind and solar energy. Telecommunication, water and sanitation are other key areas. Construction equipment finance forms about 50 per cent of our infrastructure finance portfolio and is a key revenue generator. In the construction equipment space, we offer products like new-equipment finance, refinance, term loans and top-up loans, dealer and original equipment manufacturer (OEM) funding. We offer products like large equipment finance, where we finance even offer letters of credit for imported assets. We also offer tailor made equipment solutions through our leasing solutions and rental assets. As we have about 12-13 financial institutions in CEQ lending, we feel that no single player can contribute more than 20 per cent share in market. Beyond this the risk of building a non-healthy and non profitable book increases. We will be keen to improve our share to 15-20 per cent range and provide financial solutions across the value chain to increase our infrastructure book.
What kind of marketing strategy have you adopted currently?
Renewable energy is a focus area for Tata Capital. We have entered into an alliance with International Finance Corporation (IFC), a member of World Bank group, to set up Tata Cleantech Capital Limited (TCCL). TCCL will offer lending and advisory services to small, mid-sized and even large companies to promote investment in clean technology. In the construction equipment space, we are seeking to increase our associations with OEMs. We have currently MoUs with more than 35 manufacturers, by virtue of which we are able to offer customers better rates and structured deals suited to their requirements.
As a lending firm do you think compare to India there are other countries have much potential for business growth?
We firmly believe in India´s growth story and in long term we fill that there will be ample opportunity in Infrastructure sector. We continue to keep our focus on the long term prospects and plan for them.