‘Other than roads and power, there are few opportunities’

IDFC Project Equity’s Rs3,800 crore-India Infrastructure Fund started scouting for prospective projects last year and currently has 13 in its portfolio. While its mandate is to invest in sectors across the infrastructure spectrum, MK Sinha, president & chief executive, IDFC Project Equity, tells DNA the difficulties in doing this and his take on the expressway model, among others. Excerpts:

Has there been a change in valuations in the last few months?
No, not perceptible. We face challenges on getting to an agreement with the promoters on the right value. And promoters have enough time to negotiate. Projects are getting delayed, there are land acquisition and environmental issues, so they don’t need the money right away. They can keep negotiating.

You mentioned environmental issues. The ministry has been quite aggressive in its scrutiny of projects. Does that whittle down the number of prospects that you have?
Yes, it does slow down the pipeline. We wouldn’t invest in a project that does not have environmental clearances.

Do you invest in a project before its financial closure?
We normally like to see financial closure. We may commit equity to a project before closure, but do not put in money till it happens.

How long would you like to stay invested in a project?
We are a 12-year fund extendable by 3 years. Our time horizon is long. We might exit before that but we can stay for 10-12 years.

Which are your picks among the various infra verticals?
That has not changed. It’s power and roads. You ask me three years from now, I’ll tell you the same. They’ll take up most of the capital. Other than those two, there are very opportunities. We have 3 thermal power deals in our portfolio. We would like to do something different, either gas-fired or renewable.

The strategy is to diversify. We want to invest in roads across the country, oil & gas pipelines, transmission & distribution, ports, schools & hospitals and urban infrastructure if there are opportunities. But there is no port looking for an investment, no gas pipeline, no parking lots. The telecom tower story is almost over. Our fund will reflect what the market opportunities are but it shouldn’t be an exact replica. We want to do a little less of roads and power and a little more of other sectors but it’s a challenge.

What’s the ticket size you normally look at?
We would ideally like to do $50 million per deal.

How many projects have you put in money in?
We have invested in seven roads, three power projects, one gas distribution project, one port and one solid waste handling project. Of our fund size of Rs3,800 crore, 46% is committed and 37% drawn-down.

Till when do you have to invest all your corpus?
We have 5 years from June 2009.

What’s the return on equity that you look at?
Around 18% on a portfolio basis. But it differs from project to project depending on whether we get in at the construction or operational stage. We don’t take any developmental risks. I think we’ve been able to generate what we promised our investors. It’s only over time you realise whether or not you’ve made your return but based on our experience it shouldn’t be an issue.

Any possible investments in the near future?
I hope we do something. We have been sitting on the sidelines for 8 months. We’ve not got the right valuation, that’s the primary reason.

What is your take on the expressway model where the developer’s revenues come from land development?
It’s very viable. Real estate prices are dependent on how easy it is to access or exit that location. Good roads make that possible. If you’re able to access that place easily then real estate prices go up. So you can certainly use your real estate revenues to cross-subsidise your developmental costs.

Will the extension of the concession period of roads help us bring down the level of viability gap funding?
It’s all a question of the present value of money which beyond 15 or 16 years is not meaningful unless the concession is extended to 30 or 40 years. It’s basically diminishing returns. The value of a million dollars in 2050 is probably $150 today. So it does not make much of a difference. If your VGF is say $200, even by extending the concession by another 40 years you are not going to offset the VGF requirement.