Killing it like a hooker in Hong Kong

On the Ground in India

I’m on vacation in India this week, covering mostly southern India, namely the states of Kerala, Tamil Nadu and Andhra Pradesh. We’ve been getting in a mix of the cities and the villages, and I’ve had a chance to touch base with some old colleagues who have moved here. I just wanted to fire off some initial impressions from the ground.

The power situation here is abysmal, but that has created some advantages that will serve the economy well in the future. India has about 120 gw of generating capacity, compared to the UK which has about 80 gw. This is ridiculous. The UK is now contemplationg a power shortage in about 5 years, yet it already has about 1.3 gw per million people, India has 0.1 gw per million.

What this means is that power is now unavailable from the market at the regulated official rate. In order to get power you have to pay off officials, and the unofficial rate is as high as 20 US cents per kwh. In comparison a developed market, with all its regulations and carbon taxes normally has tariffs at about 4 to 5 US cents per kwh (France for eg).

The reserve margin, or excess capacity beyond peak demand is at -20%, officially, and unofficially as high as -50%. Beyond the capital city of each state, electricity is rationed with planned power outages of between 2-4 hours each day.

The southern states plus maharashtra are the wealthiest states with a concentration of manufacturing and IT services. But power is so short that any manufacturer has to either build his own power plant or have a generator at hand to support operations. Indians have turned to distributer power generation because they have no choice. Some companies like Suzlon and Vestas have built these enormous wind farms across the barren landscape of the south. A manufacturer can buy a windmill, feed in to the grid, and take out an equivalent amount at his plant.

The nuclear power plan in India has gotten much further along than I expected. While at a diplomatic level, India has just received unanimous approval from the Nuclear Suppliers Group to buy materials, at the local level, land acquisition, design, and the political debates around the issue are well advanced. I passed by the Kudankulam Nuclear Power site, an existing site where the Russians will add 4 more reactors, and the area had ready been cordoned off, with heavy trucks starting to go in.

The electrical grid has imporoved dramatically since I was last here 3 years ago, with all the wind farms connected by high voltage transmission lines, something which is cauisng the US issues with wind development. the local grids have now all been connected and the Power Grid Corporation is working on the final North-South interconnect. This is probably the only area where the Indians are ahead of the Chinese, but the advantage seems to stem from the inherent bicoastal geography and more distributed population than any focused effort.

Power distribution reform is still at its early stages, with some cities having privatised their grids, and some still under state goverment control. Distribution is probably the most controversial area because you actually have to cut off millions of slum dwellers who have illegally tapped power lines. The more expensive but less troublesome way is to bury overhead copper cables rather than actively policing areas with distribution losses.

The road infrastructure has improved dramatically in the last 3 years, with 2,4 and 6 lane highways on many major routes. If there is one sector of the economy which is printing money right now, it is the toll road operators. Unlike transportation infrastructure in many other developing nations which are basically pork barrel-soft loan-slush fund projects for local politicians with overestimated traffic numbers, a unique tax incentive has made road developers here underestimate numbers (but of course the pork barrel element still exists!). Basically the goverment waives value added taxes when developers show low revenue numbers due to the low tolls they are required to charge. The volumes when the road is built is so much higher than the projections that the developers make out like bandits.

All the major cities are builidng metros. The Japanese are providing soft loans and technology for the Chennai metro which is currently being built. The Indian government no longer provides sovereign guarantees to any of these projects, as India is now an investment grade destination. I believe the last project they provided a guarantee to was the ill fated Enron Dhabol project.

Finance and banking
Finance is largely in the 1920s here. Bank loans are obtained by bribing bank officers for small loans, and being friends or family with the head of the bank for larger loans.

There is no concept of limited recourse, and loan applicants typically have to assign all personal and family assets to the bank.

The stock market is purely an insider’s game at the local level. The larger local investors receive tips from the tax offices, accountants, consultants, and other people in the know. In fact, trading on pure analysis without as inside edge is regarded as ludicrous. All the big brokerages are essentially stock pools which exist to manipulate stocks up and down. On a daily basis, brokers from IndiaBulls and Edelweiss and other brokerages send text messages to the millions of small investors under their wings, directing them to sell or buy particular stocks, while leading their clients. It’s really the 1920s out there.

There is no bond market for local issues, and hence there is no concept of bankruptcy. Instead all the bank lenders club together to put the company through a Corporate Debt Restrucuring process, which typically involves paying some upfront fees to lender (and bankers as well presumably), in return for an indefinite maturity extension.

This process has created literally hundreds of companies under perpetual restructuring. No one will sell when distressed, because they can always make a deal with the bank. This process only gets disrupted when there is significant external borrowing from foreign sources, one reason why the Reserve Bank of India is a predatory hawk when it spots this.

If the indian economy has an Achilles heel, it is agriculture. 700 to 800 million people depend on it, but the variabily of the monsoons, groundwater depletion and overfarming are driving desertification of large areas of the country. The south is in severe drought right now, and in the afternoon the temperature hits 40 degrees C. Inter state disputes and local politics have delayed many of the water projects. Lack of power has also been a significant hurdle.

Having said that, the agricultural sector produces an immense amount and variety of products here, This may simply be a by-product of the smallholding system, or it may be that there is enough local variations of climate and conditions to support a wide variety of plants.

Poverty and the Naxalites
India still has the kind of grinding sub-saharan africa kind of poverty that has disappeared from the south east asian ecenomies. Farmers who have taken 5000 rupees or about USD100, end up going into indentured servitude and shipped off to stone quarries and coal mines. All absolutely illegal, and civil society groups try to expose and prevent the worst of the atrocities, and yet it happens.

While a huge number of people live on less than USD5 a day, it is amazing how much you can buy for that amount in India. A college educated non-engineering graduate would probably make USD200 a month. A good meal at a local diner would set you back maybe 50 US cents.

The Naxalites are a more recent development. I think the best way to describe them would probably be a slightly Communist tinged Project Mayhem type organization. There does not seem to be a central leadership, but more than two thirds of Indian districts are supposedly under their control. They pop up randomly, extort small amounts of money or oppose some project by kidnapping someone. Their victims generally know who they are, and in fact live side by side with them in the villages. Most of the Naxalites don’t know who their leaders are, but simply follow the instructions they receive, show up here, pass this package to a person who gives you this signal. It seems like a classic uprising of the lower classes against the stratified and protected elite.

October 24, 2009 Posted by | Uncategorized | , , , , , , , , , , , , | Leave a comment

Indian Distressed Opportunities

MUMBAI: India is becoming a hot destination for ‘scavenging’. Cash-rich private equity distress funds are hovering atop the $35-billion distressed asset market in the country sighting enormous wealth-creation opportunities.

According to experts, 2006 has been an eventful year for distress funds as estimated investments in non-performing assets have grown from around $1 billion in 2005 to over $1.7 billion. It has been a safer bet for private equity (PE) players investing in distressed assets as many have fair potentials of recovery and are largely secured against tangible assets including high value real estate.

“The trend kicked-off with Asian Development Bank (through its Asian Development Management Fund) investing close to $100 million in India Cements in mid-2005. We have seen a handful of sizeable deals in sectors like cement, pharma and textiles in 2006,” said Arun Natarajan of Venture Intelligence.

Year 2006 witnessed the UK-based international fund Spinnaker Capital investing Rs 125 crore in IG Petrochemicals (IGPL). According to sources, the debt of the company was around Rs 640 crore at the time of buyout. The Hyderabad-based Pennar Industries also received an aid of Rs 120 crore from Spinnaker Capital and Eight Capital in July 2006.

As per the agreement, the funds will together pick up a 27% stake in the company after 18 months, something that Spinnaker is also doing in IG Petrochemicals, where it will pick up a 14.83% stake within a year. Sanghi Cement (GE-led foreign consortium investment of $160 million), Binani Cement (JP Morgan’s investment of $57 million), Kopran (Clearwater Capital Partners Investment of $20 million) and Shetron (Citigroup investment of $10 million) were the other major PE investments in stressed assets in 2006.

Despite the restrictions, funds continue to be active, especially, on the single-credit front, where some 15 to 20 of them are said to be operational at the moment in the country. “PE players have evinced tremendous interest on distressed assets over the past two years. There is still enough space for quite a lot number of players in the sector. The sector will be more interesting to watch once private asset reconstruction companies give more opportunities to existing lenders to recoup some part of their losses,” said Siby Antony, executive trustee, Stressed Asset Stabilisation Fund, a subsidiary of IDBI Bank.

According to experts, high debt burden of takeover assets (as a result of the recession in 1990s), rise in valuation of distress assets, multiplicity of lenders while taking over and unknown and unclear liabilities of takeover assets are the challenges faced by the investors.

Gautam V Patel, vice-president, Deutsche Bank AG, said, “The initiatives taken by regulators to empower lenders with SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act) and CDR (corporate debt restructuring) system have been successful by far. But a lot more has to be done. The regulators should also allow change of management under the SARFAESI Act. We should initiate changes in the judicial process to weed out hassles of unclear liabilities and other legal wrangles.”

India – Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 – SARFAESI Act


April 7, 2008 Posted by | Uncategorized | , | Leave a comment