April 2008, IDFC Private Equity, one of the largest private equity firms in the country, floated a separate renewable energy company, Green Infra Limited, with a vision to become the largest and the most valuable independent power producer in the country. The company has, till now, developed an operating wind capacity of 144 MW and has a pipeline in excess of 300 MW to be built over the coming years. One of the largest investor in the renewable energy space in India feels that clean technology investing in India for the foreseeable future would centre around clean energy. In an interview, Raja Parthasarathy, Managing Director, IDFC PE, about the rationale behind floating an SPV for Green Infra business, opportunity and exit landscape and expansion plans. Excerpts:-
What is the mandate for Green Infra?
The investment thesis for Green Infra was founded on three pillars. First, we needed to be a diversified renewable company as opposed to being focussed on a single vertical (biomass, wind or small hydel). Our view is that diversification mitigates risk and overtime gets better appreciated by the public markets.
Second, we felt that rather than simply aggregating disparate assets, Green Infra should have the ability to independently develop projects from concepts-to-commissioning. Third, Green Infra should be viable without excessive dependence on government subsidiaries and handouts. While these benefits may be available for a short time, the entire business plan of Green Infra was founded on the assumption that they will not be around forever.
Are you looking at diversifying your portfolio?
Absolutely. Today, Green Infra is essentially a wind company with 144 MW of operating wind capacity. The intention is to be a diversified independent power producer across five verticals – wind, solar, small hydros, biomass and energy efficiency. We intend to create five verticals, over time, which will each be sizeable in their own right to capture the diversification across the renewable energy spectrum.
What has been the total investment in Green Infra till date? What about future commitments?
We have invested about Rs 360 crore till date. This is from funds we have raised from investors within and outside India. We will take a decision in coming months on how to continue to fund the company and what the best source of capital will be. Green Infra is a very young company. Our focus over the next few years is going to be to build the business. There is much work to do in terms of creating a large sustainable profitable business.
What is the kind of interest you see from global institutional investors towards this asset class?
Within renewable (solar, biomass, wind and hydro), you can have a range of expected equity IRRs or returns on investment. It is difficult sometimes for investors to digest the fact that wind is a mid-teens business, whereas biomass could be high twenties in terms of return on equity. I think the appetite of global investors towards renewable energy in India remains very strong. But, many of them have to come to terms with the fact that not all renewable energy businesses are going to be generating 25% equity IRRs. The nature of business is such that, ultimately you are a utility and providing public good, and if one is able to generate sustainable high IRRs in the high twenties range, that should be a good outcome.
Would you look at bundling all the assets and list in public equity markets? What kind of exit opportunities do you see in this space?
I think there is clearly a public market exit opportunity in this space. There is a shortage as there are not enough listed companies in this space. There is still a story to be told for renewable energy companies being in the public market. I also think that the M&A market for companies in this sector is going to develop.
How do you assess the valuations prevailing in the market?
Valuations are always a function of sentiment. At points in time, investors get focussed on book value as being a very reliable metric especially for capital intensive businesses. The general sense was that a priced book multiple of around 2 to 2.5 times was sensible in the context of power and power generating businesses. But, if you look around today, companies are trading at 1.5 times book, so I think valuations are very much a function of sentiment at point in time. The reality is markets value cash flow. So, as long as you are generating cash flow and there is a high line of sight on projects that you are building out, valuations will be realised. Companies that are chasing cash flow and accelerating the buildout of their assets to generate high line of cash flow will be ones to benefit.
What are the key policy changes that, you think, will trigger growth in the renewable energy space?
In the early days of any industry, particularly one that creates a social benefit like renewable energy, the government does need to play a key role in terms of creating a supportive policy environment. In some cases, governments also have to extend financial support to be able to allow enterprises to get off the ground. I think you are seeing that in solar today. In fact, we are one of the few countries in the world which has announced such a big solar mission at a time when other countries in the world are rolling back the benefits. Policy is being developed in order to make solar happen in India. This is obviously a huge positive. In wind, the introduction of generation-based incentive is a step in the right direction. We are very positive on policy announcements being made. Obviously, we would want them to happen sooner than later.
Within the clean value chain, what interests you the most?
We look at everything. We are very interested in energy efficiency. In our view, a megawatt saved is actually more than a megawatt generated. So, we are very focussed on how we can do more with less. Energy efficiency is a big part of that. We made a small investment in LED manufacturing company which intends to be India’s first domestic manufacturer of LEDs. I personally feel that small hydros are interesting too. While they have their own execution challenges, the reality is that those are proven to be reliable sources of cash flow generation.
Is the India cleantech story really about clean energy?
I think, in a short term, that’s absolutely right. Over the next 5-10 years, the story of cleantech in India is going to be clean energy or power generation that’s clean. It is fair to say that, over time, you will have an emergence of a second industry based on technology allowing India to develop in the same way as US cleantech energy has.
Do you think India is not ready for very technology-oriented business models?
India certainly is ready for technology-oriented business models. I think, unfortunately, in India, you don’t have a 30-40 year track record of innovation and incubation like in the US, where the venture capital industry is very very highly developed. In India, private equity or venture capital is about 8-10 years old or a little longer than that. In India, we haven’t been able to develop the expertise as yet to properly assess technologies in the way which a seasoned venture capitalist in the US would be able to do. That said, India has tremendous talent to be able to innovate. There is certainly no shortage of capital that’s available to incubate. But, the industry needs to go through a few market cycles and see different technologies to assess which ones succeed and which don’t before being seasoned cleantech investors.
Watch the full interview .