BPO foray complements core-biz; retail IPO expected: CESC

Sanjiv Goenka, vice-chairman, CESC explains to CNBC-TV18 that investors' concerns about the company's foray into the BPO and retail sectors complement the company's core-business of power generation. Goenka emphasises that the company has adequate cash to complete the acquisition of Firstsource and adds that its retail venture would apply for a listing soon.

Below is the edited transcript of the interview on CNBC-TV18 Q: What is your response to concerns regarding forays into sectors that do not seem to complement your core-business?
A: The first point I would like to make is that our principal focus has been and will continue to be in the power sector. As power projects took longer than anticipated due to problems ranging from availability of land to environmental clearances and supply of fuel it led to the repeated extension of estimated deadlines set for completion of projects. This caused the creation of a gap between availability cash and its requirement for the power projects.
To resolve this problem, we engaged Mckinsey to help devise a strategy. The consulting agency, after conducting a study, suggested we should look at investing in the BPO (business process outsourcing) sector because it is complementary to our power business. Power is capital intensive while the BPO sector is not capital-intensive, is relatively free of government intervention, is a highly growth-oriented industry and is international.
Apart from the two projects that have got the financial approval and are under construction, there other projects which are under development and have been held up for one reason or the other. So with the surplus cash flows we have decided that we would actually invest in this space. Q: How do you react to the concerns raised by your shareholders?
A: I think it is a learning exercise for us as well. We should have communicated our plans in advance and taken them into confidence - but you live and learn. However, Firstsource is a profit-making company and our retail foray is racing ahead on the road to profits. At the store level, we already making monthly profits of about Rs 5 crore and very soon we hope the foray will start registering company-level EBITDA. So retail is looking pretty good and is set for an independent listing very shortly. Q: On Firstsource - Will you have to borrow to complete the transaction especially if your open offer is fully subscribed to?
A: We have surplus cash so there is no need to borrow. Q: Considering, at a consolidated level, a deferred tax asset and a subsidiary debt of about Rs 530 crore, net-net, in a sense, you will be borrowing, won't you?
A: At a net-net level, the consolidated debt-equity ratio is 1.1:1. For CESC, the ratio is 0.52:1 and the consolidated ratio is 1.11:1, which is still very healthy. So at a net-net level, we do not need to take debt to finance this acquisition. Q: When will Spencer's post a company-level profit?
A: I think it will be either in the Q1 or more likely Q2 of next financial year. Q: Can you give us an estimate of CESC's earnings? With two plants are under construction, when do expect an inflow of cash?
A: Both plants are on schedule- the plant in Chandrapur is due for commissioning in the early part of next year and the one in Haldia should be commissioned by October or November, 2014. Q: What is the status of the power-purchase agreement (PPA) for your plant at Chandrapur?
A: No, the PPA has not yet been signed and the discussions are in progress. I think some clarity is now emerging on the supply of fuel. We did not consider it prudent to ink a PPA without clarity on the kind of fuel that would be supplied. Now that the supply of fuel has been ensured, we are in a position to go ahead with signing of the PPA. Q: Didn't the coal fields insist on supply only if you had a PPA?
A: But now there is clarity on the portion of indigenous coal which was not there earlier. The assumption using Indian coal and imported coal caused the whole pricing structure to go haywire. So it was not right to bid or negotiate a PPA till there was clarity on the supply of coal. Q: Are you breaking even? How do you plan to ink PPAs with SEBs (state electricity boards) as most of them are neck-deep in losses?
A: We certainly do not want to sign PPAs with SEBs who are not solvent and we would not sign PPAs with utilities that are not in a position to pay. So I think the path forward us could be to initially ink a medium-term PPA as a recent clarification has stated that even for a medium-term PPA, FSAs would be applicable. That is a huge step forward. Q: Do you have plans for your IT foray?
A: I think that is something that the board would need to consider. Q: Will you invite foreign investment with an IPO on the cards?
A: It is very difficult to give an exact timeframe, but either a listing or an investment would happen sooner rather than later. The discussions are in progress and let us see how they pan out.