Infrastructure is the new age darling of investors who bet on more glamorous sectors such as retail which got severely burnt in the last round of bull run. Although infrastructure sector valuations have also taken a beating since the market peaked out in January’08, it is still being seen as a safe bet once an investor has recognised that this is a long term play.

The big issue in infrastructure sector investments is the most basic. How do you define infrastructure? When the markets were at insane levels, infrastructure firms tried to project themselves as realty firms to ride the property price boom.

This phenomena has been turned on its head over the last two years. Now realty firms are swiftly projecting themselves as infrastructure companies to take out the negative connotation attached with realty sector at present.

VCCircle chaffed through the data to get a snapshot view of what is really happening in pureplay infrastructure. While we kept out telecom as it has its own momentum, we focused on three specific verticals: construction and engineering, transportation and utilities.

These three verticals have together recorded around 300 deals (private equity) as well as M&A worth over $8.5 billion in India over the last six years, as per data collated by VCCEdge the financial research platform of VCCircle. In the first eight months of this calendar year, deals worth $2.4 billion spread across 56 transactions have been announced. This is just about twice that of whole of 2009 and is chasing the $2.9 billion peak in 2008 when 66 transaction were reported.

Guided by these numbers to deep-dive into the enormous potential for pureplay infrastructure segments sush as power, transport sectors and allied services, VCCircle is putting together a focussed and highly differentiated offering, VCCircle Infrastructure Investment Summit 2010, on October 21, 2010 in New Delhi..

Steady Deal Flow

What is interesting is that the sector does not appear to have had a significant scaledown of transactions. Conservative estimates suggest 2010 will indeed surpass the previous peak.

This is led by rise in PE deal values that has already struck a high of $1.7 billion this year, over twice last year and much higher already in eight months compared with $1.4 billion in 2008. Deal volumes also appear to be closing on to the average 35-40 deals over the last three years.

Although value of M&As in the sector is less than half of the peak in 2008 when $1.4 billion was the value of such strategic deals in infrastructure, it is almost 50% higher compared to the last calendar year already. What M&As couldn’t do in terms of size of deals, they did in terms of volumes that has already hit an all time high of 28 deals compared to around 25 transactions last two calendar years.

Focus Segments

A look deeper inside shows electricity utilities as a segment is leading the show as power generation sector attracts huge interest from PE firms. In Jan-Aug period, $1.2 billion worth of such PE deals have been announced including notable ones such as a consortium investing in Asian Genco besides Temasek, IDFC PE and others investment in GMR Energy. Significant transactions in other infra space include Sadbhav Infra-Norwest and Xander; GMR Airports-Macquarie SBI Infra Fund.

The M&A transactions are also led by electricity utilities accounting for over half of total deal size as well as volumes in the Jan-Aug period this year.

The writing on the wall is clear, investors are going long on power generation and even as other infrastructure segments continue to see action, electricity utilities is where the big gamble is being played on. For investors though, it is just about betting on India’s electricity shortage at a time when its economy is accelerating growth rate closer to double digit levels.

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