RIL AGM 2021 | There is a generational shift towards clean energy, says HDFC Chairman Deepak Parekh

Deepak Parekh, Chairman, HDFC (File image)

On the occasion of RIL’s 44TH AGM in which Chairman & MD Mukesh Ambani announced the entry into the green energy business, HDFC Chairman Deepak Parekh, top leader of India Inc, highlighted the importance of the shift towards renewable power space as the sector of the future. Moneycontrol’s Nisha Poddar spoke to Parekh about business disruptions, recovery and resilience of Corporate India.

Edited excerpts:

Q: Many big announcements have come out on the clean and green energy space. Where does India stand according to you, when it comes to the thrust towards clean energy and also the sustainability angle and climate consciousness?

A: There is a generational shift towards clean energy. And fortunately, India is being viewed very favourably on renewables. Based on the investment opportunities in renewable, India ranks amongst the top three countries after the US and China. What excites investors is the pace of change we have here in India, the plug and play model for solar park, and the fiscal and other incentives for renewables. The demand by investors is reflected also in the sharp drop in tariffs. So, overall terms, the share from renewables in India is around 25%. Now, while thermal still has the largest share at 61%, there are huge developments in carbon capture, green hydrogen, storage technologies, recycling resources, and these are opportunities that large leading companies like Reliance and Tatas and many other companies are capitalising on as we speak. So globally, whatever infrastructure is being built today the focus is to build back better. The focus is to build back green. And the focus is create green jobs. So, for India the world's focus will be on clarity of its energy policy, and maintaining sanctity of contracts. Because this is really what gives international investors confidence in our country. Now, let me move briefly to sustainability. On sustainability issues, a lot of companies are already voluntarily adopting enhanced disclosures, declaring net zero emission targets. I think long term targets may be good guideposts, but what is critical according to me, is accountability and not over-promising investors or unrealistic targets. So for instance, now you know SEBI has mandated that the top 1,000 companies by market cap have to have a business responsibility and sustainable report. SEBI's new reporting format which comes into effect this year, combines a number of international frameworks.  What I appreciate about SEBI's reporting format is that it's comprehensive yet reasonably practical implementation. All of us will be following SEBI's mandate from this year onwards. Even the Reserve Bank of India has joined the global central bank's network for greening the financial system. So, I do expect that there will be more traction on financial disclosures or climate risk in India. One sector which is going to have to have more focus is the construction sector. How to reduce its carbon footprint. And this will be challenging initially given the number of backward and forward linkages that are there in this sector like steel and cement be it wood, labor, etc. So perhaps, bodies like RERA (Real Estate Regulatory Authority) too should be looking at sustainability issues for the construction and housing sector.

Q: In India, a large part of the power generation is fossil fuels. Yes, we are building the new ones in the new direction in green and clean technology. But what happens to what's already there, that will stick with us for the lifetime and generally they have a lifetime of 25 years. Now, most of these companies have been given a lower valuation because of the ESG thrust across the world. What does corporate India thinking on this particular bit?

A: You're absolutely right. Coal is a bad word globally, but we are heavily dependent on coal, and coal will play some part in India. It's clean coal, how do you mine coal, how do you transport coal? These are some issues which India will have to tackle. But we cannot totally do away with coal because that's the mainstay today in India. But it will take years for us to move more towards renewables and less towards thermal and less dependent on coal. But you see the valuation of power companies which use coal is very very low, and even companies like Coal India and NTPC, which are stalwarts in their sector are reporting well below their book value. So you know we have to tackle this issue that coal is not going to go away in a hurry, from India, and we have to live with coal, we have to live with cleaner coal.

A: Now, talking about the other aspect which is the aftermath, or for the pandemic where digitisation and the revolution towards that have come closer to us. What is your vision for India's digital transformation? 

A: The pandemic has pulled our future forward as far as digitisation is concerned, and the credit for this must be given to the government for its foresight on digital infrastructure, particularly like payment systems UPI or other methods. You know that there are 425 million Jan Dhan accounts and 1.3 billion Aadhaar enrollments and 1.2 billion mobile subscribers. So, this JAM Trinity to my mind is India's biggest coal mine. India has got its digital structure in place. So, what we need now is to focus on legal issues or data protection. Technology is such a dynamic and evolving space but the rules need to be accepted and be clear for all stakeholders. So that's where the challenge lies, and this is globally true and not only for India, it's evolving so rapidly, and technology is changing so rapidly, what should be the rules, which should be fair and clear for all stakeholders. And data protection you know is a big issue and every day we read about it and how to save your own data how not to make it public. You know this is an issue which needs to be tackled like cybersecurity and data protection. We have a lot of work to do on these two aspects.

Q: And also, there is going to be power struggle between the big tech firms of the world, as well as the global powers, political powers, that is quite visible as we see in the country and even overseas. So, that needs to be sorted out for all of us to be cohesive when it comes to the digital transformation of the country as well?

A: That's right, absolutely as you see there is, you know, the global powers are slugging it out there, and we have to watch and see and we have to develop our own system, our own safety nets ourselves.

Q: We have seen in the midst of the pandemic also global investors looking at Indian businesses, our ability to attract FDI has been heightened, even in the COVID times. One of the companies, Reliance Industries has also showcased that in a big way. What do you think are going to be the key metrics on which the global investors will be attracted to India from now on?

A: See, we are already the fifth-largest recipient of FDI in 2020. The FDI India received in 2020 was $64 billion. So clearly, India has remained a favourable FDI destination despite the pandemic disruptions, which has now been going on for the last 14-15 months. Certainly, there have been some very large FDI inflows last year in the IT sector, in the telecom sector, and e-commerce sector. It's a reflection of investor confidence in our country. I've always been an advocate that India's sovereign rating, triple B minus, which is just one level of our investment grade, warrants an upward revision. You know for 13 years, India's rating has remained unchanged. Is it fair? Is it acceptable to us? We are on the same level as Cyprus, Croatia, Romania, countries like that. We have a large emanation of foreign exchange reserves. During the last 13 years or so we only have gone up whether the outlook is positive, whether the outlook is negative or the outlook is stable. But the triple B minus rating that India has got has not changed. Now, this is a separate subject and we need to discuss it on what should India do to get the rating changed. But the FDI and the foreign portfolio investors, the flow into India has been robust. And India is one of the preferred markets in the emerging market space. And you know you must also take into account the scale we have, the absorption capacity. India has a massive absorption capacity of foreign direct investment. Many emerging markets are small, tiny. They can't accept and they can't take in too much FDI. So, we are in a fortunate position to be able to get more and absorb more foreign exchange. So, FDI is stable, as you know it's long term, while portfolio, new investment flows are more vulnerable to safety due to changing investor sentiments. The other positive thing I see in India is the domestic institutional investment flows have been much, much stronger, even during the pandemic. And this is really a very strong weapon we have to counter the balance for foreign portfolio investors.

Q: In the last couple of years, the big investments were really coming from foreign investors. Are we going to see a large part of our business may be owned by the foreign investors. When will the Indian strategics and the business houses going to have the animal spirit once again for capex acquisition and even in going global? How is the sentiment there right now?

A: We have to have some patience. I know we have the animal spirits in our entrepreneurs, and you will not see it die. It is latent at the moment. You've seen, Reliance statement, the amount of money they are going to invest in the next few years, and they are internationalising also. So, I'm quite confident that the Indian companies will get back their mojo once the coronavirus is over and once life gets back to normalcy, and you will see more investment opportunities and acquisitions and greenfield projects also. We had a bad patch, we had some infrastructure problems, you know, whether it's in power or roads or telecom. But I think we are behind some of these, and you will see companies investing more and more money in India. The private equity market in India is huge, and private equity is temporary investors, ultimately it becomes a public investment. And it's not owned by foreigners, it may be held by foreign investors but they are temporary. They are not strategic, they are short term investors. So, I'm not too worried about your question that why are Indian investors not investing. Time will come, and then you will see there are new financial institutions that have come up like NIIF and others which have raised large sums of money from global and domestic sources, and they are ready to lend, they're ready to lend to Indian entrepreneurs. So, I think we'll have to wait for better times, then I think they are around the corner.

Q: What's the future vision of how businesses are done in the country once we are past this COVID era in your view?

A: I think balance sheet strength is the most critical item. Being well capitalised, or the importance of being able to raise capital from a position of strength and not when your back is against the wall. These are the critical factors. Raise equity when you don't need it, raise equity from a position of strength. Raise debt when you don't need the debt. You may not know when you will be able to borrow money. So, businesses really need to be cognizant of leverage, because you know, leverage is always a double-edged sword. In good times, it amplifies your profits, but in bad times it can ruin you. So, one has to be able to raise capital and there is adequate capital. Now there's been a new instrument which people are talking -- SPAC in the US, and what kind of amazing valuations companies are getting. I see a few Indians buy bonds, using the SPAC market in New York, to raise some money for equity funding. But the worrying factor to me is the uneven pace of recovery. While the jury is still out on the debate of the hybrid work model, I strongly believe that a completely vaccinated workforce is better off in offices, rather than remote working. None of the large companies has given up their commercial premises and quite a few are currently looking at large commercial spaces in India for their software business or their back office business for global companies. Unfortunately, I can't disclose the names. But being in real estate we are approached by large companies, when they want eight and 10 lakhs of square feet, and where should they locate their operations.

So, perhaps we may still see some more disruptions due to the infection, but opening is significantly stronger now compared to last year, and my prediction is that like last year, the first six months of the year were tough, but from September to March, India was rocking. I feel a similar thing will happen this this financial year also. We are almost at the end of the first quarter. It's a tough quarter because April and May have been bad so far as infections numbers are concerned. We are getting back to lower numbers, lower fatality rates, and so I feel in a couple of months at the state governments in Maharashtra and Uttar Pradesh and others have handled it exceptionally well on how to contain to control the spread of this virus. So, I'm hoping and expecting rather, the last six months of this financial year again to be very strong, and you will see that the growth everyone is talking about, near double-digit growth for this year. But we've lost the first three months.

Q: Since you raised the topic of real estate sector, any last word on the immediate troubles or challenges that the sector may face in your view.

A: I can only say our companies are doing well so we have to really look inside our walls inside our houses, and there will be some delays of payments or EMIs. People have lost their jobs, shopkeepers and restaurants and civil aviation, the sectors that we have like hospitality are very badly impacted. The large hoteliers have not given their staff up, but some of them I know are paying 50% salary. But I think the regulators realize this also and they have been reasonably open and flexible to our requests of the scheduling and moratorium. The insurance companies are doing well because there is a scare in families, in households of getting sick. So, people are taking health policies, life policies, which is good for the insurance industry. Similarly, although the domestic savings rates have come down this year compared to earlier years, we still see a flow into the mutual fund sector. So, we need the bank credit faster, the credit by the banks. But for that, as you know, people need to have expansion projects, people need to have greenfield and brownfield projects to come in for the bank financing to increase. But I'm sure that we will see that in the next few months.

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