Interview with Ashok Haldia

“It is a good time for investors to acquire assets”

PTC India Financial Services Limited (PFS) has emerged as a distinctive financial institution, meeting the financing needs of projects in the energy value chain. Classified as an infrastructure finance company by the Reserve Bank of India (RBI), PFS has a healthy portfolio with effective debt sanctions of over Rs 134 billion and equity investments of around Rs 2 billion. It is the go-to financial institution as far as debt financing of renewable energy projects is concerned and has plans to diversify its debt portfolio into other areas of the infrastructure sector and allied areas in the energy sector, that is, transmission and distribution (T&D). In a recent interview, Dr Ashok Haldia, managing director and chief executive officer, PFS, talked about the company’s achievements, challenges and future plans. Excerpts:

What is your perspective on the current state of the power sector? What have been the major successes and disappointments in the past one year?

The sector has started witnessing green shoots and the central government’s thrust on reforming the existing policies and regulations is expected to further improve the situation. For instance, the changes in the tariff policy and the proposed amendment to the Electricity Act, 2003 are positive steps that are likely to yield substantial long-term benefits. The RBI has given lenders the necessary ammunition to revitalise stranded assets and effectively deal with their promoters. Further, the past one year has seen a lot of traction for investments in the renewable energy space. Solar energy is seeing interest from large global utilities, which augurs well for the sector and industry at large. The discoms have also been given a fresh lease of life with the Ujwal Discom Assurance Yojana (UDAY). All these policy initiatives will take time to percolate to the ground level. It is pertinent to note that these government initiatives need to be translated into action at the state and project levels.

What have PFS’s key accomplishments been over the past year?

PFS has consolidated its position over the past one year. It has positioned itself as the go-to lender for developers implementing renewable energy projects and will continue to strengthen its position further. The company is diversifying its energy portfolio by financing other segments of the power sector, such as T&D, and energy efficiency. PFS is also incrementally taking calibrated exposures in other areas of infrastructure such as roads, ports and infra logistics.

What is the level of debt financing and equity investment in PFS’s current portfolio?

As of December 2015, PFS’s cumulative debt sanctions stood at about Rs 134 billion. Of this, loans for the renewable sector amounted to about Rs 72.82 billion and for thermal projects to Rs 34.33 billion. The cumulative outstanding loans as of December 2015 stood at Rs 77.95 billion. Of this, the renewable sector accounted for Rs 35.05 billion and the thermal segment for Rs 24.2 billion. PFS’s portfolio is mostly concentrated in power generation assets, but as the private sector starts investing in transmission, distribution, railway sidings, etc., thus generating demand for credit, our portfolio will also reflect the same.

What are the key trends in power sector financing? Do you see a visible change in investor sentiment over the past one year?

The thermal generation segment is plagued with a plethora of stressed assets. The projects that are under implementation have faced time and cost overruns. Due to promoters’ inability to infuse the balance equity required for the completion of these projects, which are otherwise at an advanced stage of completion, delays are increasing. There is practically no interest from private equity investors as many of them have bruises from their previous investments that are yet to be healed. There is an urgent need for Case I bids, as long-term power sales arrangements are necessary to make these projects financially sustainable with reduced uncertainties related to off-take. Completed and operational projects are not able to generate optimally, as they are suffering from low off-take. Demand in the open market remains subdued and prices are suppressed. A number of gas-based projects have not become operational, which keeps investor sentiment subdued. The UDAY scheme is a positive step and has given a boost to investor confidence. At the same time, stressed assets offer a good valuation to new investors. RBI’s stance to deal strictly with defaulting promoters will play an important role in consolidation. Hence, it is a good time for investors to acquire assets. A spurt in demand for power and the signing of new power purchase agreements (PPAs) will enable further merger and acquisition deals.

In the renewable segment, developer interest has shifted from wind projects to solar projects and their quantum has been rising steadily. The cost of lending for renewable projects has reduced by 100-150 basis points and loan tenors have increased to 16-17 years. Renewable energy projects are increasingly demanding structured financial products. Overall, investor sentiment for the conventional power segment is not quite sanguine; however, for renewable energy, investors are optimistic due to the proactive role played by the government. The transmission segment will benefit from the entry of private players through competitive bidding.

What are the key risks and challenges in financing power projects?

Implementation risks and counterparty risks are the two major risks involved in the renewable energy space. Implementation risks have impacts that are manifold in nature. Delays not only increase project costs, they also postpone the realisation of cash flows, which has a bearing on the tariff realisation per unit. Preferential tariffs have temporal validity and the slightest of slippages could lead to material impacts in realisation. Delays usually occur on account of land acquisition, right-of-way issues, and implementation of works, which are in the scope of state government agencies. Further, the counterparty risks of Indian PPAs are significant and there have been delays in the payment of dues by some state discoms.

In addition, there are some risks that are likely to amplify in the coming years. As we scale up investments in the renewable energy space, the problem of evacuation and curtailments from discoms could arise if transmission infrastructure is not strengthened. Further, the aggressive bidding in the solar segment, based on the strategic intent and competitive strength of the bidder, involves financial engineering like securitisation, forward pricing of solar equipment etc. As long as the capital structure and tariff justify the servicing of debt, the projects are sustainable.

What are the new products that PFS is planning to launch in the near future?

PFS is a nimble-footed financial institution and is capable of structuring new products tailored to the needs of developers. We follow a risk-based approach wherein every product is based on the risk profile of the project and the promoter. The company’s  innovative products take care of the financing requirements at the development and implementation stages of the project and bridge the time gap in the promoters’ funding and financial closure, among others. There is no minimum capacity limit for lending to a project, but at PFS, we generally look at project sizes of Rs 100 million-Rs 150 million and above. The funding decision depends on the scale, nature and risk profile of the project and the track record of the promoter. For instance, if a small project is started under a holding company structure with a promise of scaling up in the future, PFS would provide funding to such a project.

What will be the company’s growth strategy for the next two to three years?

Renewable projects comprise a major portion of PFS’s loan book and, going forward, will increasingly do so. Apart from generation, new businesses such as equipment manufacturing, energy efficiency, decentralised generation and rooftop solar in the renewable energy space are likely to drive demand for credit. There are opportunities emerging in the thermal segment, in projects that are starving for last mile equity and debt funding which can be tapped if viability improves in terms of third-party risks or tariff sustainability. Going forward, these projects will offer great potential in providing project management services to assist lenders in strategic debt restructuring or otherwise, particularly after the new bankruptcy law is in place. The T&D segments will also be a major part of the growth strategy. PFS will, moreover, diversify its debt portfolio into other infrastructure sectors such as roads, ports, railways and infrastructure logistics. It will continue innovating on new financing products for meeting financing needs in a dynamic context.

What is your overall outlook for the power sector for the next two to three years?

The demand outlook is positive. It is pertinent to note that the underlying demand is not reflected in the energy requirement deficit data shown by discoms. More than 30 per cent of the Indian population does not have access to electricity and the per capita consumption in the country is far lower than in other emerging economies like China and Brazil. With the expectation of industrial growth picking up and the government’s thrust on Make in India, the demand from the industrial sector is also likely to rise significantly in the future.

On the supply side, private capital has become averse to investment in thermal power projects in the past few years. Going forward, with the augmentation of coal supplies from Coal India Limited and the improvement in the financial health of discoms leading to an increase in Case I bids, stranded projects are likely to see interest from investors, especially distressed asset funds, for funding last mile equity.

New capacity addition in the thermal segment over the next couple of years would be largely driven by state-owned companies. Further, in the power value chain, the focus will shift from generation to T&D. The increasing share of renewable power will not only be beneficial for the power sector but will also help in achieving the optimal energy mix.

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