An interview of Mr. Vinayak Chatterjee, Chairman Feedback Ventures by CNBC-TV18 on the outlook of Indian Power Sector…
Vinayak Chatterjee, chairman, Feedback Ventures told CNBC-TV18 that he expects to see a significant uptick in the power sector in the next three-four months.
“Out of the number of problems that plagued the infrastructure sector, the reason for hope is that the political leadership has prioritized solving the power conundrum,” he said.
Below is the edited transcript of Chatterjee’s interview with CNBC-TV18. Also watch the accompanying videos.
Q: There was a time a few weeks back where all of us were getting more hopeful because the PMO was getting involved. There were a few statements about speedy clearances of projects etc. But subsequently in the weeks that have followed have your hopes been belied?
A: Not really. We should keep up the hopes for the simple reason that out of the number of problems that plagued the infrastructure sector, the reason for hope is that the political leadership has actually prioritized solving the power conundrum. There are very, very senior bureaucrats in the PMO and other places who have been requested to focus on the power sector.
So whether it is the huge level of interaction with Coal India or calling all the state electricity boards to discuss how to reduce their losses and clean up their balance sheets, there is a lot of background work is going on. So I am still hopeful, while we may have missed the 31st March deadline which was originally proposed, I am hopeful that in the next two or three months there would be a significant uptick in the power sector.
Q: The fuel supply agreements (FSAs) are still stuck, a lot of the power companies seem quite unhappy about the new penalty clause and the ball has gone back to the PMO’s court to try and see how they can resolve it because the power companies and Coal India are not seeing eye-to-eye on that, do you think there will be a resolution?
A: There will be, I think there is no question. We just have to live through this stage of game playing if I may put it that way because we are in a bit of an existential dilemma vis-à-vis Coal India. On the one hand, since it is virtually a monopoly, it is expected to be in public service but post listing it often acts and behaves as if it is a private company.
Clear signals have been given in terms of how it is expected to behave in the national interest. I suspect as soon as this little bit of game playing is over between Coal India and the private sector, I am personally confident that much of the resolution will be in favour of the coal users.
Q: Do you think its Coal India that we will have to blink on this accord?
A: Coal India will have to blink.
Q: What exactly is happening with the power companies in terms of their performance anyway? Yesterday one of the private companies indicated that merchant trades have actually improved significantly, but it’s not showing through in terms of their performance yet. It doesn’t look like they have gotten back to the PLFs (Power Load Factors) they had in the past?
A: Merchant rate is a very peculiar animal for the simple reason that it’s a buy versus power cut decision. Towards the en of the fiscal when they all are focused on their balance sheets they resort to large amounts of load shedding. When you resort to large amounts of load shedding you buy less power.
When you buy less power the merchant rates fall. In the beginning of the fiscal, I suspect for various reasons as soon as the buying by the DISCOMs and the consequent reduction of load shedding happens merchant power rates go up. Partly because some of the power plants are going in for maintenance and some have low coal stocks etc. I wouldn’t read too much into merchant power rates going up in the long-term in the months ahead.
Q: What is happening with the other parts of construction, any headway at all because the quarterly numbers don’t seem to indicate there is anything happening in terms of fresh inflow of projects?
A: That is true. It has been well recorded by channels like you as well as the print media, the business papers, a simple statistic tells the tale. For example, the lead indicator in the infrastructure sector is the order book of L&T.
If you read the results yesterday, L&T has very candidly said that their order booking last fiscal was 15% lower than the previous year. That tells you the story that there isn’t enough investment happening to keep the order books of the infrastructure and construction companies in robust health and that is the truth and the reality that we are facing right now.
Q: This brings us to the problem of confidence, because three months back when we spoke we were getting hopeful that maybe because of what the government is saying confidence in CEOs engaged in infrastructure projects might pick up. But it’s actually gone down. If you talk to people today they are saying, we are not investing and that’s showing up in every number in new investments that records economic activity in terms of the investment cycle. Do you see any pick up at all from people that you speak to or are people still very morose?
A: To be frank, the mood is pretty morose and gloomy, but if you look at the two broad sectors, roads is not doing too badly. As per the latest figures, between national highway and state highways, if you add both these segments, India is doing close to about 10 kilometers odd a day, roughly about 3,000-4,000 kilometers per year. It’s not a bad pace.
I wouldn’t crib right now about the road sector, forget the fact that we haven’t done 20 kilometers a day. But 10 is not bad. With this hope on the power sector saying that look if the highest people in the land from the PMO to the cabinet secretariat to coal to power all of them are putting their heads together and trying to get the whole sector cleaned up in terms of fuel linkage as well as the distribution companies, I think the mood that I have gauged from a lot of power CEOs is that they are happy that this focused attention is being given.
Although we are unhappy that it is not being resolved as quickly as we would want it to be, but the fact is that there is so much political and bureaucratic bandwidth going into attacking the problems that there is hope for this sector. But as we are all agreeing that it could have happened earlier.
Q: Also on the liquidity side i.e. the funding side, a lot of people brush that off saying that sorted but it doesn’t seem sorted in terms of how high interest cost still are for some of these companies, the fact that they still do not have access to additional capital?
A: To my mind, the cost of capital today is a less worry than the overleveraging of the balance sheets of practically every infrastructure development construction company. This is part of a larger shift. When across the last 10 years, companies that had very little debt on their books because they were EPC contractors, and/or equipment supplies went into the PPP BOT business.
This means that they had to from their own balance sheet put up a huge level of money upfront, which you recover across 20 years or 30 years. What you see is that extremely high debt leveraging of the balance sheet of development and construction companies. Now that high level of debt has made further financing difficult. This is because from the receiver side, you have hit the capacity of balance sheets to borrow more and from the banking side and from the lending side you have hit many corporate and sectoral caps.
I would worry less about the cost of capital right now as the availability of capital, the ability of financial institution and banks to disburse a fresh clean loans and the ability of the system to absorb more debt. There is somewhere in the system, there has to be a deleveraging.
This deleveraging is also apparent because you will notice that most development companies or infrastructure construction companies are doing two things. Either they are going for CDR or asst sale where a number of their SPVs, their owned assets in roads and power I are in the market. You can see this phenomenon of deleveraging happening. This process needs to carry on till we get back to financial windows being opened once again.
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