Sembcorp to buy 60% stake in IDFC's PE arm Green Infra

Below is the transcript of Girish Nadkarni and Tang Kin Fei's interview with Ekta Batra & Anuj Singhal on CNBC-TV18.Ekta: Could you throw some more light on the deal as a whole?Nadkarni: Green Infra is a company which is incorporated and incubated by IDFC and today we own 100 percent in this company. Today this company has 516 mw of capacity and soon it will touch 700 mw capacities. The current transaction is we are partnering with Sembcorp. Sembcorp is taking the controlling stake in this company. They will have 60 percent in this company. Our fund too will exist and we will continue in this company as a minority shareholder with 40 percent.

Anuj: How do you look at this deal in terms of valuations and returns?Fei: In terms of valuation of Green Infra Limited, it is based on the current plans that they have and also the pipeline of the potential investment they have in India.Ekta: What are the opportunities that you see in India in the renewable energy space given the government’s possible focus on it?Fei: India is a big country and is growing very rapidly in terms of energy demand. The current energy usage per capita is still very low. In the years to come we would expect more and more requirements of energy for the population and as the generation or power requirement in India grows, will increase in thermal power requirements and to balance the carbon emission from thermal power generation. I think every government will be concerned and every government will be supportive to have renewable energy to balance the carbon emission in the country. Therefore, we think that renewable energy in India will be a sustainable business.

Anuj: Do we see more investments coming from you to India?Fei: We already have four units of 660 mw of coal-fired thermal power plant and now we have Green Infra, there are 700 mw of wind and solar power facilities either in operations or under construction. So together Sembcorp have more than 3,000 mw of power generation capacity in India and we hope that this will then have sufficient base for us to grow further in our both thermal and renewable business in India.Ekta: Talking about the industry, have you seen any pickup in the private equity investment activity in the last six months?Nadkarni: In the last six months after the new government, we have seen significant push to the sector. Prime Minister himself is very supportive and he wants to bring lot of investment in the sector. The target is around 160 mw by 2022 and for which lot of investment will be required and we see in this sector some concession should come in terms of lower Minimum Alternate Tax (MAT) or in terms of transferable tax credits also there will be relaxation on open-access and cross subsidy surcharge and many other initiatives. As a result we will see new investment coming through also we see interest rates coming down as commodity prices are down, we will see that capital expenditure cost will come down. In some states we have seen the tariff going up, so definitely there has been increase in the activity. We received over cheers from various investors from US and many parts of the world and also some of the Indian companies. So definitely we see more activity pick up. Sembcorp is a large conglomerate with 8 gigawatt of capacity. We believe it’s a great partner for us mainly because of their commitment, their capability and also the compatibility. We rank them high in terms of corporate governance and ethics and we believe that with Sembcorp Green Infra will achieve its new success. Anuj: Could you break up that in terms of outbound, inbound or sectors and the kind of investors?Nadkarni: Activities can be broadly divided into two or three parts – there is inbound interest. I am not seeing much outbound interest from India. The types of investors are – there are US strategic investors who want to invest into India, there are many financial investors based out of various parts of the world who wants to create emerging market portfolio which can be later listed in Singapore or in US and these are players interested in the market. There are domestic strategic players who could be looking at consolidation play which can act as a platform and for more acquisitions and creating consolidated positions. These are the activities, the main interest here is in wind and solar and having said that some interest is also there in hydro.Ekta: What is the current corpus of IDFC private equity and what is the allocation policy likely to be going forward?Nadkarni: IDFC Alternatives currently manages USD 3.4 billion of corpus which is spread across three fund; private equity, infra equity and real estate. We have so far done 64 investments and we have exited out of 31 investments till now. On first fund we have given 50 percent USD IRR and Green Infra is one of the classic cases where we started as a platform, we recruited people, we scaled it up from zero to 700 mw, we are able to get strategic partner like Sembcorp who believes in this company amongst various companies in India and as a result this is a very unique example where a private equity sets up a platform, scales it up, exits and partners with large international strategic play. Going forward we have an infra fund, which is going to focus on core infra. IDFC Private Equity is also going to look at other sectors which will include food and agriculture, it would include consumers and it would include healthcare and also some telecom and media services. These are the new sectors we will also focus on going forward.