New Silk Route to skip power projects using Chinese gear

With corpus of $1.4 b, PE fund optimistic on Indian power sector.

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“Chinese equipment is not proven, therefore, we prefer to remain cautious for the moment,” said Mr Jacob Kurian.

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C. Shivkumar

Bangalore, Feb. 8

Private equity (PE) fund New Silk Route (NSR) is bullish on the Indian power sector, though the fund preferred to stay away from generation projects using Chinese equipment.

NSR partner Mr Jacob Kurian said, “While we remain optimistic about India's power sector, we would prefer to abstain from investments in merchant power stations and plants using Chinese equipment.” NSR is an emerging market fund targeting Asia and has an investment corpus of $1.4 billion.

He said, “We have no issues with projects using equipment sourced from domestic or Western/Japanese vendors.” NSR, he said, had already done some due diligence on some of the IPPs for investments, but had refrained from making investments.

Mr Kurian said, “Chinese equipment is not proven, therefore, we prefer to remain cautious for the moment.”

There are fears that the project operating risks would escalate in the event of plant failures. Consequently even where projects have tied up forward linkages, in the form of power purchase agreements, NSR preferred to remain cautious.

Chinese suppliers, Shanghai Electric Power Corporation, Harbin Electric Power, Shandong Electric Power Company and Dong Fang Electricity Power Company account for approximately 21,000 MW of the equipment to independent power companies coming up in the Eleventh Plan period and another 14000 MW in the 12 {+t} {+h} Plan period.

CEA allays fears

Although the Central Electricity Authority (CEA) in 2008 had allayed fears of project financiers on reliability issues, nagging fears still remain. IPPs had taken to Chinese equipment in view of the low prices quoted by suppliers, consequently bringing down the fixed costs.

Moreover the fund also preferred to stay away from merchant power stations. Mr Kurian said “The macro story is good, but the risks are very high.” Merchant power stations typically follow the high tariff model for revenues. This implied bidding for supplies during peak hours in deficit regions. Such high tariffs tended to escalate the financial risks.

Besides, he added, that valuations on some of merchant projects were on the high side. The high valuations consequently impacted Fund returns. NSR investments have targeted an internal rate of return of about anywhere between 25 and 30 per cent.

This is substantially higher than some of the existing PEs, with some of them targeting returns of just 20 per cent. But Mr Kurian explained that the high returns estimate were largely on account of the long lock-in periods of investments.

NSR, he said, normally locks in the investments for period of over five years. In addition, NSR, he said provided strategic advice to managements regarding growth options to incubated companies by it.

Among the infrastructure entities where NSR has invested include passive telecom. The investments include Aster Infrastructure in Hyderabad. NSR owns entire equity in this entity.

In addition NSR also had “small equity stake” in the Anil Ambani owned Reliance Infratel that has a captive business with the Reliance Telecom.