Mojo returning to power; expect M&A buoyancy: Expert

Ekta: We have seen two deals which have taken place in the past month itself within the power space. Do you think that M&A is now going to pick up quite significantly and maybe at good valuations as well despite the fact that those companies are highly leveraged and would have to get rid of the assets because of leverage concerns? A: There is no denying that there are a number of companies and assets which are highly leveraged which have seen tough times, their cash flows are under stress and therefore assets are available. The question that is debatable is how many Reliance Power’s or Adani’s are there who have actually got the power to take on more debt, whose cash flows will become positive in the next 20-30 years and therefore are in a position to buy. I think the couple of deals that we have seen are examples where they are able to take on more debt. Their own projects in the past have turned the corner, cash flows are turning positive and they are looking to buyout assets which have a 40-50 year life ahead and which are all cash flow positive. I personally think that there will be a few more deals but not the kind of mega M&A activity in the power sector that we can expect based on just these two couple of deals but certainly there will be buoyancy in the M&A space in the power sector. I think it boards well in the immediate short-term; assets are coming in to the place. I would like to add one more thing. I am also seeing a up tick in banks which have got poorly performing loans in this sector willing to takeover stressed assets by themselves as a consortium and then say can we preserve it in the short-term, develop those projects turn them around and then exit. So, banks are under pressure to takeover assets that are not performing, turn them around and then exit. You will find that also activity picking up; call it what you will call it – turnaround or call it entry by banks into the sector, I think that is something that we are seeing on the ground happening.

Anuj: How confident would you be about banks ability to turnaround these projects since you mentioned that point? A: I don’t think banks by themselves can turn it around. It can only be a short-term stop cap measure of their stepping in. In the short-term they will have to look at some other intermediary agency which is able to develop those projects, manage them, maybe commission them, etc but in the longer term they will have to get in new investors into those projects. However, banks will need to necessarily develop this skill if they have to be in the banking business because it is inevitable that some loans will go bad and they will necessarily have to step in. So, I think the positive thing that I see is the realisations by banks that they will necessarily have to step in as oppose to letting things drift and that is the positive I see in the sector.Ekta: If you look at the glass half empty then you could also tell that banks are taking over the assets because they are being proactive however the amount of loans which are going bad could possibly be increasing and hence maybe banks are now becoming more proactive to stem the losses that we are seeing. Just to extend that point, has execution from a company perspective picked up on the ground? A: I think execution from a company perspective has picked up. We are seeing a couple of assets as I said where banks want to step in. They are right now in the preserving the asset mode. They have not yet gone into further development of the asset but it is bound to happen. Going back to the point that you raised earlier, one can argue that the glass is half full but to me it does not matter whether they are stepping in because the loans are already far too stretched and they have gone beyond a point or whether they really see some positive impact of their stepping in. What matters is the fact that banks today are stepping in and are trying to revive assets and increasingly whether it is the power sector or whether it is the highways sector I think that is the way to go. I think banks will necessarily have to step in, remove defaulters. Ekta: Any anecdotal examples that you can provide us of banks having already done that in certain companies or projects? A: Since some of these deals are currently underway with us as a infrastructure services provider I can’t reveal the names. However, I can tell you that there are two power assets for example where the promoter is in default. The banks are stepping in, they are talking to us about a six month preservation window where we preserve the asset and then get on to project management and then get on to commissioning and further O&M and then try for a ultimate sell out. We have two mandates in this sector and I can increasingly see that not just in the power sector as I said earlier but in the other sectors of infra as well. Ekta: But that is the power sector that you were referring to for these two mandates? A: That is the power sector I am referring to but I can see that this will happen increasingly in other sectors as well. Highways, noteable example, I think it is staring at us in the face.