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22 | ifr special report | September 2009 PROJECT FINANCING

The answer to India’s nascent corporate bond market

On the back of their recent election victory, India’s United Progressive Alliance led by the Indian National Congress delivered a clear message: to develop India’s sub-par infrastructure with an ambitious stimulus package. The Eleventh Five- Year Plan has earmarked US$500bn to achieve this, while the previous five-year plan committed US$250bn.


he government now has the right people in the right positions,” says Anup Maheshwari, head of equities and corporate strategy at DSP

Blackrock. “There’s ownership of infrastructure projects. There’s a commitment to deliver and to attract more foreign investment, so the days of political divergence are, hopefully, in the past.”

Project financing is the mechanism the government hopes will facilitate India’s infrastructure growth. Of the US$500bn tabled, the central and state governments will provide US$350bn in a 37.2 % and 32.6% weighting, respectively,with the remaining 30.2% (US$150bn) expected to come from private investment. That’s the theory, but how realistic are these figures? Vinay Minon, executive director of equity capital at JPMorgan Mumbai, is cautiously optimistic. “I’m not completely sure if this US$500bn commitment can be fully realised. The government’s intent is positive, which is important, but the figures are high and if we are to achieve them, we need solid execution capabilities.” Total required debt financing has been estimated at Rs9.88trn (US$202bn), with Rs1.86trn in equity financing flowing into the private sector. But this still leaves two- thirds (US$100bn) to be raised as debt. How then, is India’s capital market responding?

Equity growth augurs well Unsurprisingly, following the US$500bn stimulus package announcement, India’s stocks have been among the best performing emerging market equities in 2009. In early March the Sensex slumped to a three-year low of 8,160.40. However, by August 3, it had closed at a 14-month high of 15,924.23 – a staggering 95% rebound – while the NSE Nifty had reached 4,711.10 points. “We should see a fair bit of upside in the market, certainly compared with last year, but my belief is that the market will only begin to show signs of growth in the third quarter of 2010; that’s the real indicator,” said Minon. “I expect to see growth of 5%-5.7% GDP, down slightly because of the weak monsoon.”

Infrastructure projects have increased demand for raw materials, especially steel, which posted a 5% increase last quarter as production rose to 12.8m tonnes. S K Roongta, chairman of Steel Authority of India, was quoted as saying “the company expects infrastructure spending to boost demand as much as 8% this financial year”.

Bharti Airtel and Reliance Industries are top-ten-ranking stocks as telecom and power projects spring forth across the country. “We’re long-term bullish on equity performance: 10% annualised returns are expected for 2010, reaching 15% by 2012,” says Anup Maheshwari, whose TIGER fund, launched in 2004, is

one of India’s largest infrastructure funds with US$680m of assets under management. ”All of which suggests India’s equity market has a lot of bottom- up potential.” Total investment by foreign institutional

investors amounted to US$5.4bn during April-May, while more than US$199m was pumped in during the first week of June. These capital inflows need to continue for India’s infrastructure growth to be realised. Government ministers are travelling the world to attract overseas institutional investors, but it’s the likes of India Infrastructure Finance Corp (IIFCL) and Infrastructure Development Finance Co (IDFC) – government-backed special- purpose vehicles – that hold the key to making project finance a viable option. They operate by providing infrastructure companies with cheap, long-term debt, as well as assist India’s banks through takeout financing. This helps banks transfer existing loans off their balance sheets and ease the burden they’re under to finance such massive projects. With the imprimatur to raise capital through issuance of bonds, IIFCL had, as of March 2009, sanctioned Rs187.6bn for 107 infrastructure projects totalling an estimated Rs149bn.

Ultra mega debt

Some of the biggest projects are in road expansion and power generation. Some 30.5% (US$152bn) of the stimulus package

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