Opportunities In Indian Infrastructure

January 2013

Vikram Pant Partner Infrastructure IDFC Alternatives

AGENDA

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Status of Indian Infrastructure Opportunity in Indian Infrastructure Challenges A Bit About Us

RISING TREND IN INFRASTRUCTURE SPENDING

Investment in Infrastructure (USD bn)
1200 1000 800 600 400 200 0

% of GDP (Average over period)

FY03 07

FY08 FY12

FY13 17 (projected)
Source: Planning Commission

Infrastructure spending grown from ~4% of GDP in 2003 to ~7.3% in 2012 (China is @ 9%, USA @ 2%) To sustain growth targets, this needs to increase to over 10% of GDP by 2017 Infrastructure investments during the past 5 years est. ~ INR 19.5 trillion 95% of target (INR 20.5 trillion or USD 500 bn) achieved Impressive up tick, could have been higher but for GFC
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PRIVATE PARTICIPATION IN INFRASTRUCTURE ENCOURAGING SIGNS

Until 2003, relatively small portion of infrastructure spending was from private sector

Last decade witnessed remarkable increase in private sector share with the Govt. having to rely increasingly on private sector participation
%
3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
Source: Planning Commission

PrivateSectorInfraInvestmentas%ofGDP The share of private investment in infrastructure may have to rise to ~50% of total infrastructure spending (~USD 90 to 100 billion a year) from the current 37%.

INFRASTRUCTURE AMBITIOUS PLANS & IMPRESSIVE INVESTMENTS

The Last Five years.. FY 08 FY 12 (est)

OilandGas Telecom Pipelines 1% 13% Power 32% ~ 55,000MW added (o/w about half was from private sector)

Others 22%

Total investments ~ INR 20 trillion

Railways(inc. MRTS) 13% 17,600 km of PPP road bids awarded

Ports 4%

Highways 15%

No of mobile connections rise from 261 mn to ~915 mn

Share of Private Sector is 37%. In terms of PPP investments, India is the largest market in the world ahead of Brazil, Russia and China
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THE IMPACT
End of 20th Century India Todays India

Power

Capacity miniscule (<100 GW) vs. demand IPPs struggling to get off the ground

Significant capacity built up (>200 GW); Freeing up of T&D to private sector

Ports

Small private sector participation e.g. ~30% share of container volumes

Significant private participation through minor ports with 87% share of container volumes 18K km already 4-laned, 13K under

Roads

4-laned divided carriageways rare

implementation. Transformed logistics in India.

Poor teledensity Telecom Unable to generate a growth model. Cellular service cost Rs. 16 per minute

Became a success story with 74% teledensity. Cellular service cost Rs. 0.5 (USD 0.01) per minute

PPPs & private investment emerged as an effective means to create infrastructure

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AGENDA

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Status of Indian Infrastructure Opportunity in Indian Infrastructure Challenges A Bit About Us

INDIAN INFRASTRUCTURE OPPORTUNITY

Fundamental Drivers Make Private Investment Attractive

Case for investments in India
Third largest economy on PPP basis ~ US$ 4.7 trillion. 2nd fastest growing economy Massive infrastructure requirement government will be unable to fund Attractive demographic profile: 50% of India is under the age of 30 Domestic consumption driven economy, supported by rising incomes offering a vast untapped market which the
12% 10% 8% 6% 4% 2% 0% FY08 FY09 FY10 FY11 FY12

Strong economic growth

Agriculture 9.3% 6.7% Industry 8.4% Services 8.4% 6.5% GDP

Private sector role in capital formation a necessity

Infrastructure spend to rise to ~ 10% of GDP

12 10 8 6 4

Soft infrastructure in place

Proven legal system based on English law Established accounting standards Independent regulators Well regulated and deep capital markets Supportive banking system Big pool of qualified professionals Entrepreneurial spirit
8
%

10.7 9 7.94 7.18 5.71 35

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

60 55 50 45 40 35 30

9.9 44

56

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Infra spend as % of GDP (LHS)

Private share in infra spend (RHS)

INDIAN INFRASTRUCTURE OPPORTUNITY ~$ 1 Tn of investment needed over next 5 Years (12th 5 Year Plan) 11th 5 Year Plan Achieved- ~INR 19.5 OilandGasPipelines 169 trillion*
Telecom Others Railways(inc.MRTS) Ports Highways Power Source: Planning Commission FY: April 1 to March 31 * Estimates 880 3,142 6,665 2,618 2,584 4,504

12th 5 Year Plan Target- ~INR 51.5 trillion*

OilandGasPipelines Telecom Others Railways(inc.MRTS) Ports Highways Power Source : Planning Commission 1,606 9,201 17,473 1,201 8,842 7,565 5,576

Presents an equity opportunity of ~$ 150 billion

Huge opportunity and powerful rationale for private sector to invest in Indian infra
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KEY SECTORS IN INDIAN INFRASTRUCTURE

Sector Power Current Status Way Forward

Total generating capacity of >200 GW Target addition of >100 GW in next 5 ~55 GW added in 5 years years Highest in any 5 Yr Plan since independence ~20 GW to be completed over ~27% of generation from private sector current fiscal year two-thirds of Low per capita electricity consumption <800 kWh which is private p.a. (Chinas ~2,600 kWh, global avg ~3,300 Renewable Energy incentives, RECs kWh) fuel potential in Wind, Small Hydro, Peak power deficit continues ~11% Solar. Attractive Sector >3mn kms - only 2% NH carrying 40% road traffic Out of a total NH development plan of 50,412 km, 34% complete, 25% is under implementation ~20K km of NH projects, Expressways Private sector preferred mode of development 78K kms of State Highways

Roads

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STATUS OF INDIAN INFRASTRUCTURE

Sector Ports Current Status Way Forward

High capacity utilisation and inefficient Handling capacity of ~1250 MTPA targeted operations at major ports to more than double over next 5 years Market share of major ports shrunk to ~65% Minor ports expected to be the key drivers Private sector share of 87% in container Captive customers, low revenue share to volumes improve returns

Rail

3rd largest network with 64K km track length. But poor track coverage; 3K kms added in ~30 yrs Private container train industry not yet profitable

PPP redevelopment of 26 stations 33K km targeted for development/ modernization

Telecom

2nd largest telecom market, 915mn subs. 74% teledensity 350K telecom towers, 6 players hold 91% tenancy

Compression of margins Consolidation in tower industry Size matters

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STATUS OF INDIAN INFRASTRUCTURE

Sector Urban Infra Current Status Cities matter: pop from 350-600mn by 2030 Will generate 70% new jobs, 70% GDP JNNURM: 67 cities, 552 projects Increased outsourcing by ULBs: waste management and water supply Schools and hospitals Multimodal transportation (Metro Rail, BRTS) Way Forward JNNURM worth USD50bn PPP in MSW and water supply projects govt focus on urban healthcare

Airports

Traffic grew @ 16% CAGR over last 10 years Delhi, Mumbai airports successfully privatized Greenfield airports in Hyderabad & Bangalore 136 airports; 8 handle 80% of traffic

11% CAGR growth expected over 5y (~270 mn) Up gradation of 24 non-major airports underway High capital costs; dependence on high user fees/ real estate

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AGENDA

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Status of Indian Infrastructure Opportunity in Indian Infrastructure Challenges A Bit About Us

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INDIAN INFRA SPACE IS COMPLEX AND DEMANDING

Extremely competitive Aggressive expectations of returns from infra assets Execution capabilities established Stretched balance sheets

Public Sector not keeping pace with Private Sector Delivery (coal, offtake)

Supportive Complex regulations Pace of reforms slow Governance Transparency

Shattered infrastructure valuations in public markets Valuation expectations of sponsors and private capital providers yet to converge Asset sales the only way out? 14

CHALLENGES FOR PPP IN INDIAN INFRASTRUCTURE

Targets not translated into pipeline of projects; limited institutional capacity Multiple approvals and overlap of jurisdiction, Center vs. States Example Coal India: Under prepared for pace at which generating plants have come on-stream Reliance on expensive imported coal, cost is borne eventually by the taxpayer.

Admin. Capacity

Capital

Underdeveloped LT Debt Capital Markets Pension/Insurance Sector to be opened up Equity capacity of local sponsors High savings rate (35% of GDP) not channelised enough from banks to infra: ALCO mismatch

Execution

Land acquisition Emotive issue acquiring land for public purpose perceived as being used to generate profits Fairness vs. efficiency from business point of view Delayed permits & clearances Environmental clearances Water, shifting of utilities and other clearance delays due to administrative capacity Lengthy Sponsors capital stuck in litigation instead of churning for new projects

Dispute Resolution

key challenge for success of PPPs is Implementation

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SECTOR SPECIFIC CHALLENGES

Sector

Power

Creditworthiness of off takers Net losses of Discoms at ~USD 8 billion (~0.5% of GDP) Without subsidy, power tariffs need to be hiked by 47% to break even Availability of Fuel Demand for coal for power has grown 9% CAGR since 2007, supply has grown by 6% Stranded capacity; fuel shortages over medium term will persist In FY 11, India imported 13% (75 mt) of its coal requirement; blending increases cost by ~60% Major Ports stretched; capacity utilization ~90% , turnaround time, logistics costs for shipping Delays in dredging & capacity expansion affecting competitiveness Aggressive bidding for new projects has impacted viability Hyper aggressive bidding; high divergence in L1 / L2 / L3 bids; significant differences in estimates EPC bidders prone to bid aggressively to grow order book Project viability sensitive to interest rates recent bids at peak

Ports

Roads

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ADDRESSING THE CHALLENGES THROUGH POLICY INITIATIVES

Recent Initiatives Creation of special category PE/ VC infrastructure funds (AIF) Relaxation of ECB guidelines for infrastructure projects Infrastructure Debt Fund Presidential directive to Coal India to ensure reliable coal supply Bail out of State Electricity Boards with tariff increase Up to 49% FDI allowed in aviation Land Acquisition Bill Proposal to increase FDI limit in insurance sector

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KEY RISKS: WHAT CAN GO WRONG

Policy logjam might continue Reform process might take a backseat on account of 2014 elections Populist measures by the incoming Indian govt. in 2014 External shocks like the fiscal cliff leading to recession in United States

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AGENDA

1 2 3 4

Status of Indian Infrastructure Opportunity in Indian Infrastructure And its Challenges A bit about us

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IDFC OVERVIEW

A Financially Strong and Well Respected Institution

IDFC
- Specialized infrastructure financial institution from concept to commissioning - Diversified shareholding : Foreign Investors 49 %, Government - 17%, Domestic 34%
Market Capitalization* Balance Sheet Size Net Profit (FY 2012) $ 4.6 bn $ 11.5 bn $ 304 mn

IDFC Foundation
Public Private Partnership Policy Advisory Corporate Social Responsibility

Corporate & Investment Banking

Project Finance Investment Banking Institutional Broking Investment Research

IDFC Alternatives AUM ~ $ 2.2 bn

Private Equity Infrastructure Real Estate

Public Markets Asset Management

AUM: $ 5.4 bn Hybrid Fund Mutual Fund

575 employees: largest pool of human talent focused on infrastructure in India

* As of Jan 24, 2013, calculated as USD = INR 55.00

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IDFC ALTERNATIVES

Indias 2nd Largest Alternative AMC AUM USD 2.2 billion

IDFC Alternatives
- Two Managing Partners (CEO and CIO) - Shared Services (CFO, Investor Management, General Counsel)

16 investment professionals

Infrastructure

Infra Commodities Established 2007 1 fund with total AUM of $ 927 mn 67% of fund committed across 14 assets Regular distribution+ capital appreciation Target gross IRR of 16% to 18% Asset focussed Significant minority / partnership stake Consumption Core Infrastructure Assets Infra Service Providers

Infra Equipment Manufacturers

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INVESTING IN A HIGH GROWTH BUT CHALLENGING ENVIRONMENT

Investment Strategy
GO LOCAL: market dynamics and demand drivers could vary across India Relationships with all stakeholders Make decisions independent of public market sentiment Focus on cash flows from underlying asset(s) - not from capital markets Deep diligence of promoter and understand regulatory risks Desired partner characteristics Long term basis Commitment to environment and local communities Alignment of interest Exit / liquidity strategy for each investment Take advantage of asset sale (churn) by developers

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IMPACT

Helping create Indias Infrastructure..

IDFC has helped create more than half ( >30,000 MW) of Indias private sector thermal and large hydro generation capacity. We are one of the largest lenders in the renewable space Our contribution has helped create more than half of Indias Telecom towers and two thirds of the Wireless subscriber base Financed a sixth of 32,000 kms of National Highways under PPP. Financed half of the container cargo capacity at Indian Ports Airports aided by us handle over a fourth of Indias passenger and air traffic

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ThankYou

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