Private equity players still chases infrastructure profits

A study on private equity investment in public equity (PIPE) of infrastructure companies in India undertaken by SMC Investment Solutions & Services found that the recent slump in the equity market wiped off Rs 2,428 crore of private equity capital.

Though the domestic infrastructure sector is regarded as the engine of the country's economic growth, experts say higher valuations at the time of investing and readjustment of the Indian financial markets to global economic environment has impacted the calculations of private equity players.

Apart from this, increasing prices of steel, cement and other key raw materials have started putting pressure on the operating margins of companies undertaking infrastructure projects.

However, the funds are divided on the future. Says Karthikeyan Ranganathan, head (investments), Baring Private Equity Partners India: “The country is still well positioned to grow at over 7 per cent in the long term, resulting in higher demand for electricity, airports, ports and roads.

While there will be blips due to global conditions and the domestic interest rate scenario, the long-term growth scenario is still intact and we expect this sector to continue to grow. In sectors like power, where there is a huge deficit, we can expect a lot of investment.”

On a similar note, K Sreenivas, managing partner, BTS Investment Advisors Ltd, said: “Usually, private equity players take a medium- to long-term outlook on their investment, with the period ranging between five and six years.

Short-term market fluctuations will not have any impact on private equity investment in India's infrastructure sector as this sector is expected to drive our economic growth for the next 10-15 years.”

But others say private equity players have over-estimated the growth of the market. Jagannadham Thunugutla, head (equity), Nexgen Capitals, says: “At the time of investing, private equity players had too much expectations from infrastructure growth. However, higher inflation, rising crude oil prices, tightening liquidity, higher interest rate, slowdown in industrial growth, among others, have started putting pressure.”

For example, as many as 10 private equity investors, including Eton Fund LP, CITI Group, T Rowe Price and Deutsche Bank, had invested Rs 3,841 crore in in GMR Infrastructure at the rate of Rs 240 per equity share in 2007. The share price of GMR has plunged by 56 per cent to Rs 105.55.

As a result, the market value of private equity investment in the company has halved to Rs 1,690 crore.

Similarly, Carlyle Group, which invested Rs 158.4 crore in Great Offshore Ltd for Rs 860 per equity share, has witnessed the market value of its holding fall by 30.26 per cent. The stock of Great Offshore last closed at Rs 599.75.