Infrastructure: A look at sector problems and outlook

13826 Investors following Adani Enterpris. Share this News with them.

0

Like this story, share it with millions of investors on M3

Infrastructure: A look at sector problems and outlook

At Edelweiss’ conference infrastructure panel including Lalit Jalan, CEO and whole time director of Reliance Infra, Devang Desai, chief financial officer of Adani Enterprises and M Sangameswaran, co-head— infra fund of ICICI Ventures speak about the sector and give their outlook going forward.

Post your opinion here

 

0

Tweet

Share on Tumblr

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » ALSO READ See latest News about Adani Enterpris See previous management interviews See what other Experts & Brokerages are saying about Adani Enterpris Adani Enterpris BSE | NSE 28/05/12 Are Mutual Funds betting on Adani Enterpris? Other Stocks in this news Reliance Infrastructure | Oil and Natural Gas Corporation | Coal India |

At Edelweiss' conference infrastructure panel including Lalit Jalan, CEO and whole time director of Reliance Infra , Devang Desai, chief financial officer of Adani Enterprises and M Sangameswaran, co-head- infra fund of ICICI Ventures speak about the sector and give their outlook going forward.

Desai says, sudden rise in the commodity prices was not known, which could have been estimated in terms of how the demand growth is happening in India and China. "So that possibly took by surprise in terms of the tariff fixation and the norms that were laid down," he adds.

Desai feels the government has understood that this is a starting process and there will be hiccups. "You have huge amount of monopoly on the coal side that has to perform, meet its promises. Also, you have to ensure that in the future the investments continue and the tariff structures have a proper flexibility. So, these issues are being addressed," he adds.

Desai further says, the very gesture that the government needs business and wants to sort out and ensure that the sector gets the right amount of support is a good direction at this stage. "The nitty-gritty, the micro issues, specific issues, the center state will have to go through the process. I think the thing has started. That is a very good sign from our side," he adds.

Also watch the accompanying videos for the full show

Jalan says, firstly, one needs to look at fuel in a holistic manner. "You need power. If you come to coal, clearly there is a need to rapidly ramp up production. Unfortunately, Coal India has failed. If I am not wrong, the production this year will be equal to last year with the capacities increasing at 20,000 MW a year which used to be a pretty five-year plan production zone. So that kind of growth is happening in one year," he adds.

Jalan further says, similarly on gas. "With the KG-D6 find, everybody was very bullish, lot of gas plants went into construction stage, expecting that between Reliance and GSPC and ONGC, India will be swimming in gas. We thought there will be 300-350 million cubic meters of gas. There will be more gas than there will be buyers. Unfortunately, we have had a problem with the D6 field and GSPC- ONGC are behind time, but the gas plants are ready."

Atomic, Jalan says, with the little accidents here and there even plants, which are ready, cannot be started. "You cannot just do 25,000 MW with imported coal. That's not a solution. So, the coal has to be internal, gas has to be internal," he adds.

M Sangameswaran, co-head, Infra Fund at ICICI Ventures lists out segments within infrastructure that he thinks are good plays or offers investment opportunity. He bets on road and power infrastructure. Sangameswaran believes that the problems of the road sector are brought upon itself by to a large extent by the private sector and the issues of power sector by the public sector.

Check out his explanantion:

"From our fund cases, we are focused on the power, energy and transportation space. Within transportation, we talk about roads. But as said earlier, all these problems are there in each of the sectors. I think the problems of the road sector are made by the private sector to some extent. Of course, they are issues relating to the land acquisitions and the problems of utility shifting that are there and known. But people have gone berserk in terms of bidding, and that has resulted in the problem that we have today on the road sector.

If I look at the power sector, yes, issues have been largely with regards to fuel. I am also optimist in a sense that this is not something new in terms of pattern for India. India goes through these cycles as you rightly pointed out. For example, if we look at coal in India, we have 100 billion tonne of reserves, and if you look at China, they have 120 billion tonne of reserves. We mine half a billion tonne a year, and they mine three billion. There is enough coal in India, and so, the problem is self-created. It is created by the government to some extent because we went ahead and said it is environmental issues, we said there is a go-area and a no-go area and you stop mining.

The other problem is that historically, we never saw this is a problem because Coal India was producing at 3% growth rate. That was sufficient enough for the sector to grow because we were adding 5,000-10,000 megawatts. Now we suddenly added 50,000 megawatt and we say - hey, where is the coal? If you look at it, the bottleneck shifted from power production to the coal production. Suddenly we are saying this is a problem that cannot be solved! I say it is a problem that will be solved, and I am sure we will.

If you look at all the no-go areas, we are talking about we are talking about 1%-2% under the forest area. I am environmentalist myself, but if that is a sacrifice the government and the nation has to make for longer term growth, it may not be a sacrifice. You could come and do re-plantation in some other areas and create something interesting out of it. But that is a decision someone has to take. So it is not that coal is not available, we are sitting on resources, we do not want to use it, we have created our own problems and it is solvable. That is what I wanted to say.

Secondly, the point is about risk allocation. Suddenly, as mentioned earlier, the government invites people to bid and then puts obstacles in its way. I think this is really coming out of the lack of thinking in terms of risk allocation. Who is best placed in a project to underwrite the risk? Is anybody in the private sector capable or competent enough to underwrite risk on inflation for the next 30 years? Answer is no, but when we talk about imported coal-based pricing, we say, okay, you got to ride a PPA on the basis of next 25 years. And you do not have any control on the imported coal prices, so we say we do not give you a pass-through in fuel prices. Who is going to take that risk? I think a lot of private sector bidder who went into this bidding knowing very well that this is the problem, it will be fixed at some point in time, we will figure out as we go, and that is really the challenge in India which is also the situation of the emerging market. We are still learning how to project these things properly and as it is a new sector so we are learning and going through the process. I think it will get sorted out. So I am still bullish on these two sectors.