Mumbai: Infrastructure Development Finance Co. Ltd, or IDFC, is on the lookout for a new crop of “Bharti Airtels and GMRs,” says Vikram Limaye, executive director of the infrastructure financier. IDFC is credited with having spotted Bharti Airtel Ltd and GMR Group at an early stage of their growth.
Limaye, who is in IDFC’s core team for mergers and acquisitions, also keeps a hawk’s eye on the firm’s profits. Having achieved a certain size, churning the portfolio, resetting loans and improving the spreads are IDFC’s new priorities, according to Limaye.
In an interview, Limaye talks about the paradigm shift in the past nine months in which pricing power has moved from corporate entities to lenders and investors. Edited excerpts:
Do you see a slowdown in infrastructure projects?
Over the last two years, the pace of infrastructure development was not as fast as we would have liked it to be. There has been progress, but it could have been better. But, is there a slowdown in number of projects? In terms of projects coming up for bidding and private sector participation, some projects are picking up steam.
Portfolio churning: Limaye, executive director of IDFC, says if the firm keeps growing its asset book, it will have to keep committing equity capital. The firm’s assets were booked at historically low rates, and he would like to bring them in line with prevailing rates, he adds.
There was some slowdown because there were changes in the bidding documents and the way they were selecting players, particularly in road projects. It’s been sorted out now as 53 new stretches of road have been selected for the National Highway Development Programme (NHDP). You still get 20 companies to bid for a single project. So, private sector interest for bidding has not died down.
What are the major issues you face other than policy matters?
We need to have a more steady pipeline of projects that gets bid out on a regular basis. We need to get enough institutional capacity around it to get these projects to happen.
There are concerns on land acquisition and it will become an issue for infrastructure development to pick up steam, as, today, it is a significant bottleneck for power projects.
IDFC has funded more than 320 projects. How are these faring?
(The) projects are moving okay. In a landscape as diverse as India, there will be some projects that will be delayed. There is enough interest even for the road projects. Earlier, they said they will shortlist the top six bidders, but now the authorities say they will accept the top 10.
Is it likely that IDFC’s growth will be slower this year? (The company has grown consistently at faster than 40% for the past few years.)
See, our growth will obviously be tied to what is happening in the country. There will always be enough opportunity for us to grow. Because, in the current scheme of things we are still relatively small.
Our loan book is Rs22,000 crore. Even if we grow at 30%, there is enough opportunity for us to grow at Rs6,000 crore.
What rate of growth is IDFC targeting?
Historically, when we went public in July 2005 we said we’ll grow our asset book and balance sheet aggressively, because we need(ed) to achieve a critical mass... Today our balance sheet is Rs30,000 crore. When we went public it was Rs5,000-6,000 crore.
Our focus from now on will be more on bottom line growth rather than focusing on just asset growth. In that context, we will continue to be involved in new disbursements, new projects and new sanctions activity. But we will do that in a manner such that our net balance sheet growth is a reasonable number.
But why does IDFC have to slow the growth of its asset book?
If we keep growing our asset book we will have to keep committing equity capital. What we will do is go for net balance sheet growth that will be manageable from the capital adequacy number. There are regulatory restrictions...so we want to churn our assets. Our assets were booked at historically low rates. We would like to churn them and bring them in line with prevailing rates.
In the last nine months, there has been a paradigm shift in terms of the leverage moving to investors and lenders from corporates and borrowers...pricing power has moved from corporates to lenders and investors. Private equity is (a) lot more cautious in providing capital and the terms have also changed. The valuation expectations are now different. Investors are more conservative on many of the valuation parameters.
Does this apply to debt as well?
If you take the recent report that PSU (public sector unit) banks are not willing to lend below their PLR (prime lending rate), which is around 14%, that was not the case six months ago. Thus, pricing power has shifted dramatically. From our perspective, incremental business is more profitable, churning our existing book is more profitable, because we can redeploy that in more profitable business(es). Or, we have a situation that many of the loans we do...have reset mechanisms built into the loans.
How often do you approach your clients to reset their loans?
Every 12 months, 24 months and 36 months, depending on the structure these loans will come for reset. So we’ll churn the book. We’ll try to enhance the spread or the yield that we get from the loan because there is a certain volume of loans that keep coming up for reset contractually. So, the point we are making is we don’t need to expand our book as we have reached critical size.
Has the cost of funds gone up?
The cost of funds have clearly gone up. So have our spreads... It means that I am able to pass on the entire increase to borrowers.
Where do you source your funds?
We are institutional borrowers. We don’t do retail and so we don’t accept fixed deposits from retail investors. We take funds from insurance companies, banks and, at the shorter end, from mutual funds, pension funds, etc.
Can you tell us where the spreads are now on the yield curve?
See, we are an AAA entity. So we borrow at AAA spread over the government rate. That fluctuates widely, week to week, and month to month. Last year, our spread fluctuated from 130 basis points to 230 basis points (one basis point is a hundredth of a percentage point).
Will the fiscal environment this year be better for IDFC?
This year will not be better than last year. This year, with tightening liquidity (and) with Reserve Bank tweaking the cash reserve ratio and repo rates, the interest rate has been quite adverse. So rates have certainly moved up and spreads have also widened. The good news is that the system is absorbing it. IDFC is able to pass it on. Thus, from our perspective, it has not affected our bottom line or compressed our margins.
IDFC took the risk to fund companies such as Bharti Airtel and GMR Group in their infancy and reaped the benefits. Would you do it again?
We will continue to do that. Our portfolio will always have quality established players and growth companies who we believe will be good quality firms.
We have been very actively involved with the government in developing some of the frameworks and drafting some of the concession agreements.
In addition, we are fairly disciplined to see that many of the projects are fairly structured. In our loan book of Rs24,000 crore, the net non-performing assets are zero. Our credit standards continue to be very high and we are pretty discreet on the type of projects and entities we support.
You have participated in two stages of the telecom revolution and another wave is coming with seven players entering the already crowded sector. Would you look at funding these new players?
We are actively involved in two aspects of (the) telecom space. One would be incremental funding required for the whole 3G (third generation) roll-out. The other large build-out happening is the passive tower business. We may look at the new players once they get on board (with)their new strategic partners. Some names are already out in the public domain of these new players talking to some of the global telecom players. We’ll need that comfort.
On your real estate exposure...
We have exposure to some real estate groups. Our total exposure to the real estate sector will not be more than 5-6% ...concentrated with the top five developers in the country.
The long term situations are intact… The other good news is that growth will be investment-led and will have nothing to do with what’s happening in (the) US. That in itself can fuel a decent growth.
In a slowing economy, aren’t airports a risky exposure?
On a macro perspective, the leisure and business travel will be affected if there is any kind of slowdown. But the economics is fairly complex. There are other drivers in (the) airport business such as aeronautical and non-aeronautical revenues. Therefore, on a consolidated basis, as a debt holder, we have sufficient equity cushion. Firstly, the return of airports has to (be) wiped off. Then, 30% equity has to (be) wiped off. Then only it will start eating into our portion.