The Planning Commission has an outlay of investment in infrastructure worth $500 billion by the end of 2012, with another $1 trillion to be invested during the 12th Five Year Plan. With such huge investments lined up, Sidharth Rath, president, corporate banking, infrastructure business, Axis Bank talks to Amritha Pillay on the challenges facing this industry. This is the first part of a two-part series

Amritha Pillay ML: To begin with, can you give us a general perspective of how focused is Axis Bank on the infrastructure sector?

Sidharth Rath SR: The bank has been funding infrastructure projects in a large way; it will continue to do so. As on 31 March 2010, Axis Bank had a credit risk exposure of Rs9,069.49 crore (fund-based) and Rs9,775.60 crore (non-fund based). This investment is in the telecom, road and port segments put together. In the power sector, our exposure is around Rs4,094.97 crore (fund-based) and Rs 4,352.03 crore (non-fund based).

The infrastructure business is a focus area for the bank. Axis is committed and positive about good infrastructure projects. Any viable and bankable project in any infrastructure segment will be looked at positively. Our total gross credit exposure industry-wise is highest at 9% in infrastructure.

ML: How bullish are you on each of the segments in infrastructure — given each of these are plagued by their own share of political issues — environmental clearances being a major one?

SR: Each and every infrastructure project has its own share of environmental issues. In India we will have to go through processes and procedures, which will take their own time. Things have moved slowly in the past. But we have witnessed a new thrust from the government on infrastructure development. These issues are being discussed at the highest level, so obviously certain ways would be found out on how to expedite clearances.

ML: Moving towards a sector-specific outlook, what is your view on the ports segment?

SR: In general, we are bullish on ports; trade movement has to take place. But to be specific about individual port projects — they have their own characteristics. The sector is a major requirement in infrastructure and hence I am bullish on the sector. But, to be specific, it all depends on the location, hinterland traffic and connectivity — road and rail are important and need to be taken into account. As a sector, it has fine opportunities. For the last fiscal (as of 31 March 2010), our total credit-risk exposure to the port sector was Rs682.27 crore through funds and another Rs1,222.84 crore which is non-fund based.

ML: If location plays an important role, do ports on the west coast enjoy an advantage?

SR: The west coast definitely has the headway. Jawaharlal Nehru Port Trust (JNPT) and Mundra Port both have proved to be successful in terms of container traffic. Ports on the west coast cater to both the northern and western markets. Thus, definitely, the west coast has an advantage.

However, this does not mean that the east coast is not doing well. Chennai has a container terminal. We also see a number of other container terminals coming up. Of course, traffic on the west coast is well placed, but the east coast has an edge in the container segment.

ML: Roads and power are two important segments in the infrastructure space. From a banker’s point of view, what are the main risks?

SR: There is an overall demand for infrastructure development across segments. How we fulfil this demand is the main issue. When we look at individual projects as a banker, we will have to look at the merit of individual projects. How competitive is the project — be it a road, power or a port project. Our credit exposure to road construction has been around Rs1,542.56 crore through funds and another Rs822.69 crore is non-fund based.

For road projects, the main factor is project implementation. We need to factor in issues like land acquisitions and environmental clearances at the time of appraisal. These are the issues at the start-up stage, but we will have to look beyond whether there is a specific demand. If the traffic is not as per expectation, the entire project fails.

If it’s a power project, the dynamics of fuel supply, competitive rates of accessing this fuel, power off-take arrangements and evacuation facilities like transmission lines are the main issues. Each of these risks need to be factored in and the risk mitigation for each of these needs to be worked out.

ML: Taking the power off-take point forward, what are you more comfortable with — merchant power or long-term power purchase agreements (PPAs)? What is your view on the various power companies which have large untied capacities?

SR: Both have their own advantages and disadvantages. Smaller projects are good for merchant power. Smaller projects like small hydro-projects or gas-based projects are good for merchant power as the capacity can always be reduced or increased depending on demand. It can cater to peak demand, when the tariffs are generally higher. For large projects, obviously, the power capacity has to be tied up through long-term off-take agreements. The long-term (approach) is what banks should be comfortable with.

Every player is tying up power capacity in one or the other way. Some power companies are tying up with State utilities, some are tying up with traders. Some capacity is being kept untied for merchant power. Banks will not be ready to finance power projects without a tie-up in place. Banks insist that a certain level has to be tied up. However, this level depends upon the merit and the competitiveness of the project developer. Huge capacities cannot be left for merchant sales. Banks will not be comfortable in funding (such projects); they will insist on having a certain level of capacity tied up.

ML: What kind of returns do you think private power companies should expect, given the high volatility of merchant power rates?

SR: For any infrastructure project, around 20% is the expected rate of return. In infrastructure you cannot expect really high returns — as these are long-term projects with long implementation and operational periods. One cannot factor in merchant power rates on a long-term basis. Such high points in merchant rates arise at certain intervals of time; those who have implemented their projects can take advantage of that. If there is an opportunity for merchant power to maximise returns then it is obviously welcome.

ML: What is your perspective on the aviation industry?

SR: In the aviation industry, airports have a fair amount of potential, civil aviation traffic is going up, thus definitely the country needs good airports. Considering the manner in which the traffic has been growing, (the) potential is huge. It depends on how it works out along with the location, size, and other aspects of a particular airport project. If the project is very large, one has to see how viable it is and how quickly will it generate returns. There is a potential for airports at metros other than the four main ones. It depends on how they are developed and how is the viability issue addressed.
— Amritha Pillay