Sometime close to April next year, the Delhi-based National Power Exchange (NPEX) will go live. It is backed by heavyweights such as National Thermal Power Corporation, National Hydroelectric Power Corporation, Tata Consultancy Services and Power Finance Corporation. But there is already talk of a merger between NPEX and one of the two power exchanges set up earlier: the Indian Energy Exchange (IEX) promoted by Financial Technologies (India) and the Power Exchange of India (PXIL) promoted by National Stock Exchange and National Commodity and Derivatives Exchange. Meanwhile, a fourth, Marquis Energy Exchange, is all set to gatecrash. A power exchange is where buyers who have a shortfall and sellers who have surplus power transact. An overwhelming majority of power producers in India sign long-term power purchase agreements (PPA) with distributors to reduce risk. But most of them also have a certain amount of surplus power which they sell at the highest price they can get in these exchanges. Similarly, most distributors tend to have long-term, fixed-price agreements for the bulk of their requirements but depend on power exchanges to meet the shortfall when power demand exceeds the normal.The stage for the exchanges was set on 10 June 2003 with the formulation of the Electricity Act. The new regime sought, among other things, to streamline electricity trades, and do away with opaque bilateral deals. In February 2007, the Central Electricity Regulatory Commission laid down the ground rules; in June 2008, IEX was rolled out followed by PXIL four months later. But even as power exchanges proliferate in the country, they are grappling with all sorts of issues — from regulatory clarity to lack of enough "products" to sell. In India, short-term electricity transactions are done via bilateral contracts, power exchanges and unscheduled interchange (UI). Some 10 per cent of the total electricity generated in India is transacted via the short-term market; power exchanges make up for 2 per cent of the total share. In January 2012, while 89.6 per cent of the electricity was tied up through long-term contracts, 6.1 per cent was traded via bilateral contracts, 2.9 per cent through UI and 1.5 per cent via exchanges.We now have a unique power exchange market: a power-deficit market peppered with multiple exchanges. During April 2011-February 2012, the power deficit was more than 8 per cent; it shot up to 11 per cent during peak hours. Against the generation target of 855,000 million units (MU) for the period, we generated only 7, 98,949.49 MU. Data on the growth of the power exchange market during the period was not available. However, it grew from Rs 3,563 crore in 2009-10 to Rs 5,389 crore in 2010-11. "Mumbai wakes up an hour earlier than Calcutta; there are periods when surplus power flows from the northern region to the south and vice versa," says Jayant Deo, managing director and CEO, IEX. In case of a power deficit market, exchanges deal in residual power coming from different parts of the country in small quantities, which is pooled together to make a substantial quantum. "The benefit of deemed open access has not been seen yet"Jayant Deo, MD and CEO of the Indian Energy Exchange During monsoons, a few states in the south draw less power; the drier north and central India pull more; the east has a surplus almost throughout the year; and the big metros are always power hungry. But while IEX has been successful, PXIL has been struggling. It has a low market share and a diminishing net worth — its net worth had turned negative last year. The Central Electricity Regulatory Commission (CERC) has asked PXIL to present a detailed plan for improving its numbers. According to the regulations, all exchanges have to maintain a minimum net worth of Rs 25 crore.Trades, Damn Trades Power exchanges receive 2 paisa each from the seller and the buyer as fee per unit. The volumes traded in the DAM (Day-Ahead Market), the first product launched by IEX and PXIL, drives the exchanges' fee. Explaining DAM's utility, M.G. Raoot, managing director and CEO of NPEX says, "It (DAM) tides over daily contingencies such as transformers tripping or a surge in power demand during festivals." Gradually, power exchanges have managed to wrestle away DAM trades from the OTC (over-the-counter) market. Says a Tata Power Trading Company (TPTC) insider, "DAM trades were low in the OTC market. They never generated big revenues for traders. When power exchanges moved in with their transparent model of price discovery, they became the biggest players in DAM." Deo agrees, "The exchanges opened up a lot of bottled up capacity. And power started moving from surplus states to deficit states." 300 projects arelisted with IEXfor renewableenergy certificates Over time, the exchanges have not only built a stronghold on the DAM but have also developed the market. Out of more than 44 traders listed with CERC, only 10 trade actively in the OTC segment; five of them have cornered 80 per cent of the volumes as of 2010-11, the latest period for which data is available. They include the likes of PTC India (35 per cent), NTPC Vidyut Vyapar Nigam (17 per cent), National Energy Trading & Services (14 per cent), Reliance Energy Trading (11 per cent) and Tata Power Trading Company (8 per cent). But trading volumes on the power exchanges can be misleading. "Both the exchanges (IEX and PXIL) account for 15 billion units of the total 60 billion units of power in short-term trades. But this is only in DAM as we have not been allowed to deal in monthly contracts," says Rajesh Mediratta, senior vice-president at IEX. The total electricity transacted on both IEX and PXIL was recorded at 2.77 billion units in 2008-09; it was 7.19 billion units in 2009-10 and 15.52 billion units in 2010-11. While DAM trades picked up quickly, it was different in the case of TAM (Term-Ahead Market), which includes intra-day, day-ahead contingency, daily and weekly products. Trade in the TAM segment, which was introduced in 2009, was only 0.0982 billion units in 2009-10 and 1.98 billion units in 2010-11.break-page-breakIronically, the factors which helped the exchanges to carve out a niche in DAM trades have proved to be a hurdle to TAM trades. That is because the exchanges require buyers to make an upfront payment for them to provide a security payment to sellers. This amount increases because of longer TAM contracts. So buyers prefer to enter into bilateral OTC agreements that do not require advance payments. In the OTC market, a buyer is required to provide a letter of credit to the seller but industry insiders say this is not always complied with, thus increasing the attractiveness of the OTC market for the buyers. "Exchanges are best suited to sell surplus power on a daily basis where payments are assured, and for selling or buying small quantum of power to meet contingency needs. But as a seller, we prefer the OTC market as there is too much fluctuation in the exchanges. Also, prices are better in the OTC market, and for thermal generators like us who source coal from the international market where prices are linked to international indexation, it is not possible to sell via exchanges," says Satish Jindal, CEO (Power Trading) of JSW Energy Trading.However, trade in RECs (Renewable Energy Certificates), which came into play last year, offer a silver lining to the exchanges. RECs address the mismatch in renewable energy resources in different states and the requirement of the obligated entities to meet their renewable purchase obligation (RPO). REC trades are exclusive to power exchanges and happen on the last Wednesday of every month. One REC certificate equals 1 MW hour of renewable energy generated. The volume of REC transactions on IEX rose to 200,000 RECs in March 2012 from 200 RECs in March 2011. "It adds substantially to our revenue generation and it is one of the major streams we have got. It has proved to be much better than expected. This year we traded 9.5 lakh RECs and we expect an increase of 30-40 per cent. In one year, revenues from REC trading have come close to 10 per cent of our total revenues," says Mediratta. "We will need to open our markets for off-shore trade to take place"M.G. Raoot, MD and CEO of the National Power Exchange IEX has presently 300 projects registered with it, with a total capacity of 2,000 MW. Says Mediratta, "We saw an increase in the registration of the capacity. Also, the last REC trading session saw — other than obligated entities such as discoms, open-access consumers and captive consumers — the participation of Power System Operation Corporation (POSOCO) to offset their carbon footprint. This is a good sign, and corporates can look at this avenue as part of their corporate social responsibility obligations." There is also an offshore interest in REC trades. Says Raoot, "We were recently contacted by a company in Amsterdam that wants to buy RECs to meet their obligations. So, we have to open our market for such trades to take place." Possibilities aside, power exchanges feed off revenues from DAM and REC trades. Turf Battles And All That MessRegulatory hurdles in introducing medium-term and long-term products have caused the share of power exchanges to be stuck at 2 per cent. While trading companies make most of their gains in the monthly contracts, exchanges are still caught up between the power regulator and the commodities market regulator, both of which are battling each other over the right to regulate. The exchanges planned to bring in weekly and monthly contracts in 2009 but got caught between CERC and the Forward Markets Commission's claims on the futures market. So they can deal only in DAM and TAM until the matter is resolved by the Supreme Court.Traders are confident of retaining their stronghold in the futures market. "The exchanges will not be able make a big impact even if they entered the medium-term and long-term market. The week-ahead product launched by the exchanges received a lukewarm response from the market and the same would happen to the monthly contracts. So, in that way exchanges cannot be much of a competition for us," says the TPTC expert. While the exchanges wait for the two authorities to settle the issue and enable them to launch medium- and long-term products, even they believe that it will not add much to their revenue base. "Since we provide payment security by taking an upfront margin from the buyers, they will find it difficult to cough up huge advance payments required to trade in the weekly and monthly markets. Since traders don't take money, buyers will find OTC market more attractive. We don't expect a huge shift from traders to exchanges in the futures market," says Mediratta.Price is another advantage that traders seem to have over the power exchanges for attracting sellers. Insiders say that there is a price difference of 20-25 per cent between the power exchanges and the traders. The price of electricity transacted through traders touched Rs 7.29/kWh in the year the exchanges were set up. It came down to Rs 5.26/kWh in 2009-10 and Rs 4.79/kWh in 2010-11. In comparison, the price of electricity transacted at the power exchanges touched Rs 7.49/kWh in 2009-09, it came down to Rs 4.96/kWh and Rs 3.47/kWh in 2009-10 and 2010-11, respectively.While at the exchanges, a market-cleared price is discovered, which helps in keeping the prices low, traders come out with electricity prices based on one-on-one negotiations. Also, the volume of electricity traded by trading licensees is on the higher side. The figures available for the month of February 2012 are true to the trend. While traders transacted electricity at Rs 4.45/kWh, it was Rs 3.34-Rs 3.50 for the power exchanges. With the cost of electricity generation at Rs 2.50-Rs 3.0, the prices prevailing at the exchanges do not offer enough incentive to the generators. Most of them prefer to trade in the OTC market and bring the buyers along with them. 25% The estimated price difference between power exchanges and traders Power exchanges have also been waiting for open access consumers to come out and start trading in the open market. The Open Access Act provides consumers of one megawatt and above the freedom to choose their own supplier. According to the Act, distribution utilities no longer have the universal service provider obligation and, consumers, in case they choose another supplier, will only have to pay a wheeling and a cross-subsidy charge to the utilities. The law ministry cleared the roadblocks in the implementation of this mechanism towards the end of last year when it came out with its note stating, "...all 1MW and above consumers are deemed to be open access consumers and that the regulator has no jurisdiction over fixing the energy charges for them". However, the enthusiasm seems misplaced now. Even after five months of this clarification issued by the law ministry, exchanges are yet to see any demand from open access consumers. "The benefit of deemed open access has not been seen yet. The industries are not clear about the final procedure; there is a need for clear regulations in the market," says Deo of IEX.chhavi(dot)tyagi(at)abp(dot)in(This story was published in Businessworld Issue Dated 04-06-2012)
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Way back in 1984, the Tata Group entered the real estate business by setting up Tata Housing Development Company as a subsidiary of Tata Sons. It stood out because most industrial houses shunned property development those days. Even the industrialists who were building up conglomerates or diversifying into new areas rarely looked at realty, then considered a messy business. On the other hand, real estate barons such as Kushal Pal Singh of DLF, the Ansal brothers (Sushil and Gopal), Ramesh Chandra with his Unitech brand in Delhi, and the Rahejas, the Hiranandanis, Mofatraj Munot with his Kalpataru Group in Mumbai, to name a few, were cementing the foundations of their real estate empires in the 1980s and the 1990s.Cut to 2012, and many traditional industrialists have embraced real estate as a big business opportunity. The Mahindras have their realty play. The Godrej property dream is being realised by a team under Pirojsha Godrej, a third generation scion. UB Group's Vijay Mallya has developed a couple of iconic towers and a mall in Bangalore on land that he inherited. The Wadias are developing their massive tracts of textile mill land they own in the heart of Mumbai. B.K. Birla's Century Textiles is on the same path. The Ashok Piramal Group has been in real estate for over 10 years and has scaled up by acquiring a couple of defunct textile mills. And there are dozens more.Meanwhile, the Tata Group set up a second company — Tata Realty and Infrastructure (TRIL) — in 2007 to focus on information technology parks, special economic zones (SEZ) as well as airports, roads and bridges. This is quite apart from Tata Housing Development Company, which has roughly 45 million sq. ft under development currently. Some of the corporate houses have got into the game as they have acres of land assets which they acquired decades ago, mostly for other businesses. Others simply see it as another opportunity that can yield rich dividends. Either way, the newcomers are challenging the hegemony of the older and traditional realty houses as they carve out their own property plays.The TriggerThe economic liberalisation and the real estate boom of 1994-97 set off an avalanche of investments into the traditionally-closed real estate sector. It received further impetus when the Union government allowed foreign direct investment (FDI) in realty in 2002. A huge shortage of housing — now pegged at 28 million units — is a fundamental that throws up huge opportunities. Besides, the 1994 boom, where realtors saw galloping growth and huge returns on investment, got a lot of mouths watering. "Those who initially came in were either those with large land assets they wanted to leverage or those with a pile of cash who wanted to invest it in real estate to maximise returns," Rajeev Bairathi, property consultant DTZ's co-head of investment advisory, told BW.Among the more prominent players who entered real estate was Mukesh Ambani's Reliance Industries (RIL), though in many ways it was not a purely commercial venture initially. In the early 2000s, Reliance Land was floated as a subsidiary to service the vast needs of the group for offices and residences for its growing army of executives. Interestingly, the Reliance Land strategy was to build assets by acquiring residential properties at bargain prices during the 2003-05 real estate trough. By leveraging the group's large demand, Reliance Land was able to buy over 2,000 apartments in Mumbai, Surat and Jamnagar at very favourable prices.Later in the decade, after the split in the group, Mukesh went into SEZ development, with plans for SEZs in Maharashtra and Gurgaon. But RIL has faced problems over land acquisition since. RIL has been in realty in Mumbai's Bandra-Kurla Complex (BKC), too. It picked up an 18-acre BKC plot for Rs 1,104 crore in 2006 to develop a convention centre and a commercial hub that would include its own headquarters. However, the plot was locked in litigation for years with brother Anil Ambani's Reliance Infrastructure challenging the award to RIL. In recent months, there is a move to develop the property in alliance with Mumbai's Wadhwa Developers.break-page-breakDown south, Mallya has also got into realty, though in a limited way. His UB Group held a large parcel of land on Vittal Mallya Road where it developed UB City, an iconic real estate project. The project includes the 500,000 sq. ft UB Towers, which mostly serves as the company's headquarters, as well as well-laid out service apartments over 800,000 sq. ft, which were developed in alliance with Singapore-based Oakwood Group. This was, however, a one-off project by the UB Group. A more concerted bid was made in the past decade by Essar. The Ruias-led group floated Equinox Realty as an independent business vertical. After about six years of work, the company has developed a high quality, 1.2 million sq. ft Equinox Business Park in Mumbai, and is in the process of setting up a 216-acre Vadinar residential township in Jamnagar. Equinox today has nearly 300 acre under development as township residences and commercial offices.Some smaller groups merely traded in land. They sold surplus holdings to make windfall gains when land prices began going through the roof. For instance, DCM Shriram Consolidated sold its 38-acre Swatantra Bharat Mills estate in West Patel Nagar to DLF in August 2007 for Rs 1,700 crore. It was the country's largest private sector land transaction then. Similarly, the sick public sector giant National Textile Corporation (NTC) sold five of its 25 mills in the heart of Mumbai between March and July 2005 for a humungous Rs 2,020 crore. It included Jupiter Mills, Apollo, Mumbai Textile, Elphinstone and Kohinoor Mills No. 3 — totalling 50 acre. The sale proceeds have been used to pay off retrenched NTC workers and refloat some of the mills that had the potential to be revived.Good performers such as Hindustan Unilever (HUL) and Siemens too have consolidated their operations to free up land and estates to improve their cash flow, but have not entered the real estate sector. In April 2012, HUL sold off its former training centre, Gulita, in Mumbai's Worli to the Ajay Piramal-promoted Piramal Realty for Rs 452 crore. More than a decade earlier, in 1998, Siemens sold off some 2 acre of its office estate in Mumbai's Sakinaka to consumer goods entrant P&G for Rs 13.5 crore — a big sum then. The latter went on to construct its country headquarters there. "They may not be in real estate, but they made more money selling land than in their core industries," remarks Pranay Vakil, chairman of property broking house Knight Frank India.But there are those who came in purposefully as real estate developers over the past 10-15 years. Property consultants Cushman & Wakefield, in a survey released during the second big boom in 2006-08, reported that as many as 200 corporate entities had amended their memoranda of agreement (MoA) to include real estate operations such as residential and commercial development, SEZs and software parks, hotels, malls and amusement parks. Such companies ranged from textile manufacturer Standard Industries to tyre cord producer Nirlon and Shalimar Paints.Says Mumbai builder Niranjan Hiranandani: "Three kinds of businesses came into real estate in recent years — those looking for a one-time windfall opportunity, those that had long-term ambitions, and those who were sitting on plenty of land."Textile RealtorsTextile companies have leveraged their land assets to maximum advantage. Some private mills have sold their land to other developers — Standard Mills hawked off its Mumbai Worli unit to Sheth Developers for Rs 135 crore in 2003. The more astute have preferred to do it themselves. Many of these, including Phoenix Mills, promoted by T.B. Ruia, Bombay Dyeing and the Ashok Piramal Group, are now textile companies only in name as their primary activity has shifted to property development. B.K. Birla Group-promoted Century Textiles, which holds 40 acre in Worli, was the last of the city's textile mills to shut its operations in 2007 and is currently developing a first-phase, Rs 600-crore commercial project for leasing to banks and service sector companies.This mass movement to realty has come because of the exponential rise in land prices in Mumbai — an unprecedented 20-fold increase in the past decade. Land cost in NTC auctions in 2005 were at around Rs 7,000 a sq. ft; it ballooned to Rs 14,000 per sq. ft by 2007 and the latest auctions of Bharat Mills have fetched over Rs 41,000 a sq. ft. A similar transformation is not seen in Kolkata's limping jute mills as land does not command the same kind of premium. The transformation of the textile district of Mumbai — Parel and central Mumbai — has also been facilitated by a regulatory regime that has encouraged industrial units to shift out of Mumbai and the amendment of development control rules (DCR) that allow textile mills to exploit their land as realty. An interesting case study is Ashok Piramal Group, which used its land assets to diversify into real estate, while holding on to its core textile functions too. The group kicked off its entry into real estate by incorporating Piramal Holdings in 1997 and developing Mumbai's first mall, Crossroads, in central Mumbai, and following up with a second, larger mall-cum-parking-hub in south Mumbai called CR2. Simultaneously, the flagship Morarjee Goculdas Spinning & Weaving Company was split into Morarjee Realties and Morarjee Textiles, which continued with the original textile operations. Later, in 2005, Morarjee Realities and Piramal Holdings were merged to form Peninsula Land, which undertook among the earliest projects on mill land in Mumbai.These include the well known Peninsula Business Park developed on the Parel unit of Gokuldas Morarjee Mills and the high-end residential complex in a second unit of the mill, also in Parel, called Ashok Towers. Peninsula Land thereafter did a joint venture with Swan Mills at Sewree, in Mumbai, to develop the Ashok Gardens project. The company also expanded its land bank through acquisitions. For instance, in 2005, it picked up a majority stake in the defunct Dawn Mills from its promoters Ravi and Nirmal Ruia. The 6.5-acre mill today has transformed into a swanky commercial office complex nearing completion.break-page-breakA comparison between the financials of Peninsula Land and Morarjee Textiles shows why textile tycoons prefer selling homes and offices to spinning yarn. Peninsula Land recorded sales of Rs 779 crore for FY 2010 and a net profit of Rs 250 crore. Sales fell to Rs 501 crore in FY2011, but the company still made a profit of Rs 191 crore. With the realty business gripped by recession, the first three quarters of FY2011 saw sales of just Rs 201 crore, but there was still profit after tax of Rs 74 crore. Morarjee Textiles, on the other hand, has over the past three years recorded sales in excess of Rs 300 crore, but turned in a net loss of Rs 6.2 crore in FY2010, and a marginal profit of just Rs 4.6 crore in FY2010-11. In the case of Bombay Dyeing, where realty accounted for about 25 per cent of the company's Rs 1,950 crore turnover in FY2011, the promoters — the Wadias — are very clear on the direction of the company. They are currently developing high-end residential and commercial property in their two mills spread over 55 acre in central Mumbai and are looking to exploit their substantial land banks in other centres too. "We will essentially become a real estate firm in years to come," Bombay Dyeing managing director Jeh Wadia told shareholders last year.Those With Cash PilesThen there is Bharti Airtel, which made galloping profits in the early telecom years and was looking to deploy it to get maximum returns though Bharti Realty. Says DTZ's Bairathi: "Bharti did not have large land parcels, but it had a substantial cash pile; and it had domain knowledge as it was already in the business of acquiring and developing a large network of offices for itself."Bairathi, who has watched Bharti from close range, says the company formed a realty arm quite early on to take on the complex task of identifying, buying and leasing operational centres and offices all over the country as part of its telecom business. From an adjunct to the telecom operations, Bharti Realty grew to set up captive retail stores after the group inked a cash-and-carry joint venture with global retailer Walmart. By 2008, the group had poached senior DLF executive David Rebello, and launched its own independent realty business.Focused on north India and the national capital region, Bharti Realty has been since buying land as if there is no tomorrow. It has picked up three land parcels totalling about 20 acre near the Delhi airport, investing close to Rs 1,000 crore with the intention of developing upscale commercial offices and malls. The company's website says the projects at Aerocity hospitality district near the T3 terminal will have a humungous 1.5 million sq. ft. of offices and retail shopping.Bharti Realty is also developing its maiden mall, a 360,000-sq. ft project, in Ludhiana. Clearly, the focus of the company is on large format spaces — commercial offices, IT parks, and retail areas for leasing. It is also developing commercial offices on Gurgaon's Golf Course Extension Road as well as an IT park in Manesar, Haryana. Ironically, Bharti Realty has recently been in talks with realty giant DLF to buy out two of the latter's 25-acre plots in Noida that have clearances for developing IT parks. The deal is being valued at Rs 250 crore. Bairathi estimates that Bharti has deployed about Rs 2,000 crore in acquiring land banks, and it is hungry for more. The company declined to participate in this story.Leveraging Brand Value"We neither had a cash pile nor did we carry the dowry of a large land bank," says Anita Arjundas, managing director and CEO of Mahindra Lifespaces, the realty arm of the Anand Mahindra-led M&M Group. Recounting M&M's foray into property business in 1997, Arjundas says it started with the formation of Mahindra Realty, initially an offshoot of the steel joint venture, Mahidra Ugine Steel Company. "When Anand Mahindra took over the reins and reviewed the group's focus, he saw real estate development as central to India's growth story, as a part of building India's infrastructure," says Arjundas.Leveraging the M&M brand, the group kicked off its realty play in partnership with the Tamil Nadu government in 1997 by setting up an industrial township near Chennai spread over 1,500 acre. The Mahindra World City Developers, in which the state government held 11 per cent equity, initially opened in 2002 as an auto ancillary export hub. It later accommodated IT services too, and now has 60 companies with a combined export value of Rs 4,500 crore. Having set up the industrial infrastructure, the company is developing residential and other support infrastructure, toppings that will provide lucrative returns. The success of its Chennai ‘World City', an integrated business city, won an invitation from the Rajasthan government to replicate the project in Jaipur. The long-gestation model, initiated by Mahindra Realty, is now being tested out at the 3,000-acre Jaipur World City project in which the Rajasthan government holds a 26 per cent stake."Learning from Chennai, Jaipur has come up faster and the first 500 acre of infrastructure is already in place with 37 functioning IT companies that include Wipro, Infosys and Deutsche Bank. The ‘World City' model is the first successful public-private partnership in township development," says Arjundas. The company has so far sunk in Rs 1,000 crore in the Jaipur project and expects an additional deployment of $2 billion over 20 years.On the corporate front, the Mahindras expanded the business by first acquiring GE Shipping's real estate division called Gesco in 2000, after it was drafted as a white knight to avert a hostile takeover bid by the Dalmias. Anand Mahindra then merged Mahindra Realty and Gesco to form Mahindra-Gesco. Mahindra Realty had meanwhile developed among the first of Mumbai's high-rise luxury buildings, Mahindra Towers, at Tardeo, and had begun acquiring additional land parcels in Pune, Delhi and Mumbai. Mahindra-Gesco was among the first to list in 2001, and again was the first to do a public funding through a qualified institutional placement, raising Rs 500 crore in 2006.break-page-breakMahindra Lifespaces, as the company was rechristened in 2006, has been active in residential projects too. It picked up industrial land in an auction by ICICI Bank of bankrupt company GKW, and has developed an 8-acre residential project with 250 units in Mumbai's eastern suburb of Bhandup. "Recession hit us hard with almost zero sales over 5-6 months in 2008-09. Our market capitalisation fell from Rs 4,000 crore in 2006 to Rs 1,250 crore now. But we weathered it well, and continued with construction," says Arjundas. The ability to tap cash from the M&M system — a luxury not available to an independent builder — kept the company afloat till fortunes revived, she adds. The consolidated results of the company for FY2012 show sales rising to Rs 700 crore from the previous year's Rs 610 crore, while net profit too has grown 10 per cent to Rs 119 crore from Rs 108 crore in the same period.For the $1.3-billion Godrej Group, primarily identified with consumer durables, "the rationale for entering property development was a combination of three factors: a sizeable land bank, a strong brand we could leverage, and the substantially higher margins," Pirojsha Godrej, the newly-appointed managing director and CEO of Godrej Properties, told BW. Significantly, the massive 2,000-acre sprawl owned by Godrej & Boyce in Mumbai's north-east suburb of Vikhroli is a land asset that has largely remained locked over issues such as the Urban Land Ceiling Act (ULC) and coastal regulation zone (CRZ).Unknown to most, Godrej Industries entered real estate early launching its first residential project, Godrej Edenwoods, in 1991. It was, however, in the mid-2000s that the group floated Godrej Properties and identified realty as a major growth area. "A few years down the line, property development will be the group's largest business," group chairman Adi Godrej had said in an interview he gave in 2006.In pursuit of that vision, Godrej Properties adopted the joint development model as its main driver. "The joint ventures with landowners worked well as we did not need to lock up scarce capital for buying land," says Pirojsha. Godrej Properties has executed or has in the pipeline as many as 14 such joint ventures, including the most recent one with Jet Airways for the development of 1 million sq. ft of commercial office space in Mumbai's Bandra Kurla Complex. Jet had acquired the 2.5-acre plot in an auction almost a decade ago, but has been unable to go it alone because of the serious cash flow problems it has faced.Godrej Properties has notched up sales of just Rs 453 crore in FY 2011 and Rs 420 crore for the first 9 months of FY2012. Though profit-after-tax has been reasonably good — Rs 131 crore in FY2011 and Rs 58 crore for the three quarters of FY2012 — the rapid scale-up of the realty business has not been anywhere near the target Adi Godrej dreamed of in 2006. The joint-venture model has the inherent problem of slow decision-making and has worked against rapid growth.Godrej Properties's vision of a high-growth company may, however, be realised with the Vikhroli land now opening up to development in recent months. The company has launched several residential and commercial projects after ULC and CRZ clearances have come through. Among these is a 2 million sq. ft township of commercial and residential buildings called The Tree. Industry sources say about 600 acre had now opened up for development. To speed up Vikhroli Estate's development, Godrej & Boyce has signed up Godrej Properties for managing development for a flat fee of 10 per cent of revenues.It's Not All Hunky DorySome companies have had their noses bloodied and have exited as fast as they had entered. A classic case was D.B. Gupta — the promoter of pharmaceutical company Lupin Laboratories, who had set up Landmark Developers over a decade ago. Landmark built Mumbai's first suburban mall in 2002 — The Hub, in Bandra. The company also developed and sold a few standalone properties such as Star TV's suburban headquarters on the Andheri-Kurla Road, The Masterpiece. However, Gupta exited The Hub, selling it to investors for close to Rs 200 crore, and wound up property development activity following pressure from Lupin investors against risky real estate positions.Electronics major Videocon was similarly an early mover in the late 1990s with company chairman Venugopal Dhoot deploying profits made from selling television picture tubes into real estate. Some of Videocon Realty & Infrastructure's early projects included the reconstruction of the burnt down Handloom House (Fort House) in south Mumbai, and the commercial office building, Videocon Tower, at Delhi's Jhandewalan Extension. It has also done a residential project along Mumbai's Napean Sea Road called The Wilderness. A spokesperson for the group conceded the company had virtually exited from realty. Others who had shortlived real estate forays include Emami Realty, Lloyd Steel and Satyam promoter B. Ramalinga Raju's property and infrastructure venture, Maytas, which shut down under a cloud of scams. Says Bairathi: "Many of these groups that failed treated real estate as a short-term foray. Realty is a tough business that needs to be supervised by a CEO and governed by checks and balances. You cannot treat it as an arm of your core business, or a kind of arbitrage operation."Property broker and consultant Jones Lang LaSalle's chairman and country head, Anuj Puri, points out that the realty business still continues to function on personal relationships with a high degree of cash dealings. Corporates have often failed to grasp these nuances. "Some have failed because they could not understand how the approval process works," Puri adds. Hiranandani puts it another way: "Property development requires a set of entrepreneurial skills that are quite different from corporate or industrial skill sets."But the consensus is: corporate entry has improved business practices. Hiranandani acknowledges real estate has seen big changes. "Every 10 years, I have seen a 100 builders leave the industry, and another 100 new ones join. The Rahejas, the Mittals survive. Siraj Lokhandwala, the Majithias and Ranbir Maker have bowed out. Meanwhile, there has been a merger of old entrepreneurs with the new corporate leaders. You see far better quality and professionalism today."Jones Lang LaSalle's Puri agrees. "Corporates entering real estate has introduced processes and transparency where there was none. It has created branding and pushed the importance of delivery schedules." And some are all for more corporates entering the fray. Says Shashi Kumar, head of real estate investment advisory at Birla Sunlife AMC: "More corporate houses should get in. It will help clean up the industry."gurbir(dot)singh(at)abp(dot)in(This story was published in Businessworld Issue Dated 04-06-2012)
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Tata Power has put on hold all new imported-coal based projects, its chief financial officer said, warning that it would be a challenge for the company to meet its target of a five-fold increase in generating capacity by 2017.The country's power generators have been slow to add much needed capacity due to fuel shortages, delayed regulatory clearances and debt-crippled distribution utilities buying less power.Tata Power had put on hold its 2,400 megawatt project in Maharashtra until it gets more clarity on the regulatory environment in India and coal exporting nations, CFO S. Ramakrishnan told Reuters.The company will press ahead with its only imported coal-fired project, a 4,000 MW plant in Gujarat state, hoping the government eventually allows it to raise tariffs to reflect higher import costs.Coal accounts for two thirds of power production in India, which is struggling to produce enough power to meet the demands of a fast-growing economy and increasingly affluent population of 1.2 billion people.A change in Indonesia's mineral export rules has pushed up the cost of coal for Indian buyers, who source 70 per cent of their coal imports from the southeast Asian nation, making about 9,000 MW of imported coal-based projects in the country economically unviable, including Tata's Gujarat plant.The projects were originally bid for at a fixed tariff and now Tata Power, Reliance Power and other power producers are lobbying the government to raise the prices at which they sell power to state-run distribution utilities."As of now we have put all our imported coal plans on hold," Ramakrishnan said.The expansion will be "subject to the (Indian) government coming out with an appropriate policy on how the issue of imported coal price will be handled and how the export restrictions that are being brought in by the export countries ultimately settle," he said.Tata Power commissioned the first 800 MW unit at its Gujarat plant early this year and is incurring losses since it cannot pass on higher fuel costs.The company imports about 5 million tonnes of coal per year, which is expected to rise to 14 million tonnes next year, largely to fuel its Gujarat plant. It will, however, miss its target to import 25 million tonnes by the 2014/15 financial year, Ramakrishnan said.He said it would be difficult for Tata Power to raise its capacity to the targeted 25,000 MW by 2017."It looks like a challenge because of both the global economic outlook, Indian economic outlook and India power sector issues," he said.The company now operates around 5,000 MW of capacity.Last week, India's largest power producer NTPC said it would miss its 2017 capacity target, blaming the government for chronic fuel shortages.(Reuters)
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With the commissioning of the fifth unit of the Mundra power plant in March, Adani Power has overtaken Tata Power as India's largest private thermal power producer. Tata Power, however, is still India's largest private integrated power producer with a total capacity of 5,297 MW — 4,447 MW is coal-based and 850 MW is from hydel, solar and wind energy. The company started life as Tata Electric nine decades back. In contrast, Adani Power, set up in 2008, has taken four years to reach 4,620 MW of thermal power capacity at Mundra. Parent Adani Enterprises also has a generation capacity of 40 MW of solar power at Surendranagar in Kutch, Gujarat. However, going by current projections, Adani may replace Tata Power as the largest private power producer by 2013, when its capacity reaches 10,000 MW against Tata Power's projection of 8,297 MW. Says a Tata Power spokesperson: "We are not competing with anyone for the top position. We are an old player and we operate with a different philosophy which is not necessarily to remain on top." Tata Power's unit size ranges from 4 MW to 800 MW, while Adani Power only has units in multiples of 330 MW upwards. "We have a large pipeline of projects. This would again be a combination of small- and big-sized plants as well as hydel and renewables with thermal plants being the predominant contributor," says the spokesperson.For the current year, Adani Power is on schedule to commission the final two units (660 MW) of its Tiroda thermal power plant in Maharashtra. An additional 1,320 MW will come from its Kawai plant in Rajasthan. This would peg its capacity addition at 7,300 MW by December 2012. The rest 3,000 MW will be added by future projects.Other big private power producers include Lanco Infratech (4,388 MW), Essar Power (2,200 MW) and Reliance Power (900 MW), apart from mid-sized and small power generators. Essar Power also has plans to hit 11,470 MW by 2014.Adani's stay at the top, however, may be shortlived if Reliance Power sets up its projected capacity — it has three ultra-mega power plants at Sasan, Tilaiya and Krishnapatnam, each with a capacity of 4,000 MW. It has set a goal of 25,000 MW capacity by 2015. Currently at 900 MW, it hopes to add up to 5,000 MW by December 2012. In comparison, Adani has projected a capacity of 20,000 MW by 2020 and Tata Power 25,000 MW. Expect the power scene to hot up this decade. (This story was published in Businessworld Issue Dated 04-06-2012)
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Adani Power Limited (APL) on Tuesday announced that the company has accepted the resignation of its executive director and chief executive officer (CEO), Ravi Sharma with effect from June 30, 2012. The company has appointed Vineet Jain as executive director."Ravi Sharma is leaving the company for personal reasons," APL announced in a press release. The board of directors of APL had appointed Jain as an ED with effect from May 14, 2012."After taking over business development function, which was earlier handled by Ravi Sharma, Vineet Jain now assumes the overall leadership role of project implementation, O&M and business development initiatives of the power business of Adani Group," the company statement said. Jain joined Adani Group in 2006. He had successfully implemented the 4620MW thermal power plant at Mundra, a 40MW solar power plant, the world's largest private HDVC transmission network and was responsible for O&M of operating power plants among other things.Meanwhile, Adani Power shares ended flat on Wednesday at Rs 48.10 on BSE, while the benchmark sensex closed positive at 16,862.80 up 194 points.
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The government's proposal to set up a coal regulator is good news for the power sector. As per the Coal Regulatory Bill, the body would look into timely development of the blocks, penalties on non-performers as well as pricing of coal. An effective, independent watchdog could bring in much needed transparency and efficiency in the coal sector. These plans though, have met rough weather with senior ministers opposing the excessive executive powers of the regulator. That apart, concerns exist over its power to fix and revise coal prices annually. It would not only take away Coal India's right to do the same but judging by company's unsuccessful past attempts to raise prices (due to resistance from power producers), there's no guarantee a coal regulator would be able to regulate prices any better. Or for that matter, could it do any better than the coal ministry on any of the issues? It could just end up creating posts for bureaucratic idling.
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A KPMG International report on merger and acquisition activity (M&A) in US, Argentina and China reveals that Shale gas may prove to be a "game changer" for world energy markets. As compared to traditional fuels, shale gas has recently been touted as a low-cost, carbon-friendly alternative. Significant deposits of shale gas are being discovered throughout the world. The KPMG report mentioned the factors affecting M&A in the shale gas sector in US, Argentina, China with large known recoverable reserves—each at quite different stages in developing their shale gas industries.According to the poll, US is considered to be a maturing shale gas industry. It is seeing consolidation, repositioning and the entry of new domestic and foreign investors into the sector. Long-term pricing considerations are primarily driving current US M&A transactions, according to 46 percent of respondents to the KPMG Global Energy Institute survey.A large portion of US shale reserves have been discovered. As these reserves are depleted, US investment in domestic shale gas will peak and investors will look for replacement reserves. Most respondents (52 per cent) believe that US investments in shale gas will move cross-border in 5 to 10 years; 25 per cent believe this will happen even sooner.Argentina is on the cusp of large-scale production, and its local producers are looking for joint venture partners to help develop the industry's tremendous potential. The Argentine government actively promotes foreign investment in its shale gas industry and offers substantial government support.Analysts are optimistic that Argentina's shale gas industry is poised to emulate the success of the US shale gas industry. According to 76 percent of respondents, South America will become the destination of choice for companies investing in shale gas outside the US, trailed by the Asia Pacific (13 per cent) and Europe (9 per cent). Early indications suggest that the country is already drawing a larger share of shale gas investment. This brings us to China. China's shale gas reserves are a dozen times greater than its conventional gas reserves and could be the world's largest. China's restrictions on foreign investment may hamper the shale gas development in the country."In a world of rising energy prices, pressure to reduce harmful emissions and geopolitical instability, each of these countries has a huge stake in developing its shale gas production and distribution capabilities." Says Wayne Chodzicki, KPMG's global head of Oil and Gas. He also adds that "Given the abundance of shale gas reserves, investors have a world of choices as to where they invest next."KPMG is a global network of professional firms providing Audit, Tax and Advisory services. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative, a Swiss entity.
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Shares in Reliance Industries gain 1.6 per cent as traders say the company is increasing the volumes of its ongoing share buyback programme.The Indian energy conglomerate has bought 14.3 million shares since its buyback opened on February 1, traders estimate. It will close on January 2013.Reliance had purchased 167,768 shares from the market as of early afternoon on Thursday.Reliance Industries shares have dropped 9.3 per cent this month as of Wednesday's close, as investors remain concerned about its earnings outlook and its gas reserves.(Reuters)
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