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Opportunities In Indian Infrastructure

January 2013

Vikram Pant Partner – Infrastructure IDFC Alternatives

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AGENDA

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Status of Indian Infrastructure Opportunity in Indian Infrastructure Challenges A Bit About Us

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USA @ 2%) To sustain growth targets.RISING TREND IN INFRASTRUCTURE SPENDING Investment in Infrastructure (USD bn) 1200 1000 800 600 400 200 0 % of GDP (Average over period) FY 03 ‐ 07 FY 08 ‐ FY 12 FY 13 ‐ 17  (projected) Source: Planning Commission Infrastructure spending grown from ~4% of GDP in 2003 to ~7.5 trillion or USD 500 bn) achieved Impressive up tick. ~ INR 19. could have been higher but for GFC 3 .5 trillion 95% of target (INR 20. this needs to increase to over 10% of GDP by 2017 Infrastructure investments during the past 5 years est.3% in 2012 (China is @ 9%.

50 2.PRIVATE PARTICIPATION IN INFRASTRUCTURE – ENCOURAGING SIGNS Until 2003.50 3. having to rely increasingly on private sector participation % 3. 4 .00 1.00 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 Source: Planning Commission Private Sector Infra Investment as % of GDP The share of private investment in infrastructure may have to rise to ~50% of total infrastructure spending (~USD 90 to 100 billion a year) from the current 37%. relatively small portion of infrastructure spending was from private sector % Last decade witnessed remarkable increase in private sector share with the Govt.50 0.50 1.00 2.00 0.

600 km of PPP road bids awarded Ports 4% Highways 15% No of mobile connections rise from 261 mn to ~915 mn Share of Private Sector is 37%.  MRTS) 13% 17.000MW added (o/w about half was from private sector) Others 22% Total investments ~ INR 20 trillion Railways (inc. India is the largest market in the world ahead of Brazil.INFRASTRUCTURE – AMBITIOUS PLANS & IMPRESSIVE INVESTMENTS The Last Five years. Russia and China 5 . In terms of PPP investments.. FY 08 – FY 12 (est) Oil and Gas  Telecom Pipelines 1% 13% Power 32% ~ 55.

Cellular service cost Rs. Transformed logistics in India. demand IPPs struggling to get off the ground Significant capacity built up (>200 GW). 13K under Roads 4-laned divided carriageways rare implementation. ~30% share of container volumes Significant private participation through minor ports with 87% share of container volumes 18K km already 4-laned. 0.5 (USD 0. 16 per minute Became a success story with 74% teledensity.g.THE IMPACT End of 20th Century India Today’s India Power Capacity miniscule (<100 GW) vs.01) per minute PPPs & private investment emerged as an effective means to create infrastructure 6 . Freeing up of T&D to private sector Ports Small private sector participation e. Cellular service cost Rs. Poor teledensity Telecom Unable to generate a growth model.

AGENDA 1 2 3 4 Status of Indian Infrastructure Opportunity in Indian Infrastructure Challenges A Bit About Us 7 .

INDIAN INFRASTRUCTURE OPPORTUNITY Fundamental Drivers Make Private Investment Attractive Case for investments in India Third largest economy on PPP basis ~ US$ 4.7 9 7.3% 6.4% Services 8.94 7.9 44 56 % 39 Infra spend as % of GDP (LHS) Private share in infra spend (RHS) .18 5. 2nd fastest growing economy Massive infrastructure requirement government will be unable to fund Attractive demographic profile: 50% of India is under the age of 30 Domestic consumption driven economy.7% Industry 8.5% GDP Private sector role in capital formation a necessity Infrastructure spend to rise to ~ 10% of GDP 12 10 8 6 4 Soft infrastructure in place Proven legal system based on English law Established accounting standards Independent regulators Well regulated and deep capital markets Supportive banking system Big pool of qualified professionals Entrepreneurial spirit 8 % 10.4% 6.7 trillion.71 35 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 60 55 50 45 40 35 30 9. supported by rising incomes offering a vast untapped market which the 12% 10% 8% 6% 4% 2% 0% FY08 FY09 FY10 FY11 FY12 Strong economic growth Agriculture 9.

842 7.5 trillion* Oil and Gas Pipelines Telecom Others Railways (inc.142 6.201 17.504 12th 5 Year Plan Target. MRTS) Ports Highways Power Source : Planning Commission 1.473 1.565 5.576 Presents an equity opportunity of ~$ 150 billion Huge opportunity and powerful rationale for private sector to invest in Indian infra 9 .~INR 51.665 2.201 8.INDIAN INFRASTRUCTURE OPPORTUNITY ~$ 1 Tn of investment needed over next 5 Years (12th 5 Year Plan) 11th 5 Year Plan Achieved.618 2. MRTS) Ports Highways Power Source: Planning Commission FY: April 1 to March 31 * Estimates 880 3.~INR 19.5 Oil and Gas Pipelines 169 trillion* Telecom Others Railways (inc.606 9.584 4.

300 • Renewable Energy incentives.a. Expressways Private sector preferred mode of development • 78K kms of State Highways Roads 10 . global avg ~3.KEY SECTORS IN INDIAN INFRASTRUCTURE Sector Power Current Status Way Forward • Total generating capacity of >200 GW • Target addition of >100 GW in next 5 ~55 GW added in 5 years years Highest in any 5 Yr Plan since independence ~20 GW to be completed over ~27% of generation from private sector current fiscal year – two-thirds of • Low per capita electricity consumption <800 kWh which is private p. (China’s ~2. RECs kWh) fuel potential in Wind. 34% complete.412 km. • Peak power deficit continues ~11% Solar.600 kWh. • Attractive Sector • >3mn kms . 25% is under implementation • ~20K km of NH projects. Small Hydro.only 2% NH carrying 40% road traffic • Out of a total NH development plan of 50.

low revenue share to volumes improve returns Rail • 3rd largest network with 64K km track length.STATUS OF INDIAN INFRASTRUCTURE Sector Ports Current Status Way Forward • High capacity utilisation and inefficient • Handling capacity of ~1250 MTPA targeted operations at major ports to more than double over next 5 years Market share of major ports shrunk to ~65% Minor ports expected to be the key drivers • Private sector share of 87% in container • Captive customers. 6 players hold 91% tenancy • Compression of margins • Consolidation in tower industry • Size matters 11 . 915mn subs. But poor track coverage. 3K kms added in ~30 yrs • Private container train industry not yet profitable • PPP redevelopment of 26 stations • 33K km targeted for development/ modernization Telecom • 2nd largest telecom market. • 74% teledensity • 350K telecom towers.

dependence on high user fees/ real estate 12 .STATUS OF INDIAN INFRASTRUCTURE Sector Urban Infra Current Status • • • • Cities matter: pop ∆ from 350-600mn by 2030 Will generate 70% new jobs. 8 handle 80% of traffic • 11% CAGR growth expected over 5y (~270 mn) • Up gradation of 24 non-major airports underway • High capital costs. BRTS) Way Forward • JNNURM worth USD50bn • PPP in MSW and water supply projects • ∆ govt focus on urban healthcare Airports • • • • Traffic grew @ 16% CAGR over last 10 years Delhi. Mumbai airports successfully privatized Greenfield airports in Hyderabad & Bangalore 136 airports. 552 projects Increased outsourcing by ULBs: waste management and water supply • Schools and hospitals • Multimodal transportation (Metro Rail. 70% GDP JNNURM: 67 cities.

AGENDA 1 2 3 4 Status of Indian Infrastructure Opportunity in Indian Infrastructure Challenges A Bit About Us 13 .

offtake) $ Supportive Complex regulations Pace of reforms slow Governance Transparency Shattered infrastructure valuations in public markets Valuation expectations of sponsors and private capital providers yet to converge Asset sales the only way out? 14 .INDIAN INFRA SPACE IS COMPLEX AND DEMANDING Extremely competitive Aggressive expectations of returns from infra assets Execution capabilities established Stretched balance sheets Public Sector not keeping pace with Private Sector Delivery (coal.

CHALLENGES FOR PPP IN INDIAN INFRASTRUCTURE • Targets not translated into pipeline of projects. limited institutional capacity • Multiple approvals and overlap of jurisdiction. States • Example Coal India: Under prepared for pace at which generating plants have come on-stream Reliance on expensive imported coal. Capacity Capital • • • • Underdeveloped LT Debt Capital Markets Pension/Insurance Sector to be opened up Equity capacity of local sponsors High savings rate (35% of GDP) not channelised enough from banks to infra: ALCO mismatch Execution • Land acquisition Emotive issue – acquiring land for ‘public purpose’ perceived as being used to generate profits Fairness vs. Center vs. efficiency from business point of view • Delayed permits & clearances Environmental clearances Water. shifting of utilities and other clearance delays due to administrative capacity • Lengthy • Sponsors’ capital stuck in litigation instead of churning for new projects Dispute Resolution key challenge for success of PPPs is “Implementation” 15 . cost is borne eventually by the taxpayer. Admin.

∆ turnaround time. supply has grown by 6% ‘Stranded capacity’. logistics costs for shipping • Delays in dredging & capacity expansion affecting competitiveness • Aggressive bidding for new projects has impacted viability • Hyper aggressive bidding. fuel shortages over medium term will persist In FY 11.SECTOR SPECIFIC CHALLENGES Sector Power • Creditworthiness of off takers Net losses of Discoms at ~USD 8 billion (~0. power tariffs need to be hiked by 47% to break even • Availability of Fuel Demand for coal for power has grown 9% CAGR since 2007. India imported 13% (75 mt) of its coal requirement. capacity utilization ~90% . blending increases cost by ~60% • Major Ports stretched. significant differences in estimates • EPC bidders prone to bid aggressively to grow order book • Project viability sensitive to interest rates – recent bids at peak Ports Roads 16 .5% of GDP) Without subsidy. high divergence in L1 / L2 / L3 bids.

ADDRESSING THE CHALLENGES THROUGH POLICY INITIATIVES Recent Initiatives Creation of special category PE/ VC infrastructure funds (AIF) Relaxation of ECB guidelines for infrastructure projects Infrastructure Debt Fund Presidential directive to Coal India to ensure reliable coal supply Bail out of State Electricity Boards with tariff increase Up to 49% FDI allowed in aviation Land Acquisition Bill Proposal to increase FDI limit in insurance sector 17 .

KEY RISKS: WHAT CAN GO WRONG Policy logjam might continue Reform process might take a backseat on account of 2014 elections Populist measures by the incoming Indian govt. in 2014 External shocks like the fiscal cliff leading to recession in United States 18 .

AGENDA 1 2 3 4 Status of Indian Infrastructure Opportunity in Indian Infrastructure And its Challenges A bit about us 19 .

4 bn •Hybrid Fund •Mutual Fund 575 employees: largest pool of human talent focused on infrastructure in India * As of Jan 24.IDFC OVERVIEW A Financially Strong and Well Respected Institution IDFC . 2013.5 bn $ 304 mn IDFC Foundation • Public Private Partnership • Policy Advisory • Corporate Social Responsibility Corporate & Investment Banking • Project Finance • Investment Banking • Institutional Broking • Investment Research IDFC Alternatives AUM ~ $ 2.2 bn •Private Equity • Infrastructure • Real Estate Public Markets Asset Management •AUM: $ 5. Government .00 20 .17%. Domestic – 34% Market Capitalization* Balance Sheet Size Net Profit (FY 2012) $ 4. calculated as USD = INR 55.Diversified shareholding : Foreign Investors – 49 %.Specialized infrastructure financial institution – from concept to commissioning .6 bn $ 11.

Two Managing Partners (CEO and CIO) .2 billion IDFC Alternatives .IDFC ALTERNATIVES India’s 2nd Largest Alternative AMC – AUM USD 2. Investor Management. General Counsel) 16 investment professionals Infrastructure Infra Commodities Established 2007 1 fund with total AUM of $ 927 mn 67% of fund committed across 14 assets Regular distribution+ capital appreciation Target gross IRR of 16% to 18% Asset focussed Significant minority / partnership stake Consumption Core Infrastructure Assets Infra Service Providers Infra Equipment Manufacturers 21 .Shared Services (CFO.

not from capital markets Deep diligence of promoter and understand regulatory risks Desired partner characteristics Long term basis Commitment to environment and local communities Alignment of interest Exit / liquidity strategy for each investment Take advantage of asset sale (churn) by developers 22 .INVESTING IN A HIGH GROWTH BUT CHALLENGING ENVIRONMENT Investment Strategy GO LOCAL: market dynamics and demand drivers could vary across India Relationships with all stakeholders Make decisions independent of public market sentiment Focus on cash flows from underlying asset(s) .

IDFC has helped create more than half ( >30.000 kms of National Highways under PPP.000 MW) of India’s private sector thermal and large hydro generation capacity.IMPACT Helping create India’s Infrastructure. We are one of the largest lenders in the renewable space Our contribution has helped create more than half of India’s Telecom towers and two thirds of the Wireless subscriber base Financed a sixth of 32.. Financed half of the container cargo capacity at Indian Ports Airports aided by us handle over a fourth of India’s passenger and air traffic 23 .

Thank You 24 .