Kirsteen Morrison identifies some showcase opportunities in renewable energy, water and agriculture in India
Environmental markets in India are gaining traction. The government is eager to reduce constraints on economic growth and accelerate the pace of infrastructure investment in order to increase living standards, remove inflationary bottlenecks, optimise resource use and propel economic growth to a sustained average rate of 10%. As the investment pace picks up, a number of exciting, attractively valued Indian companies active in the environmental sectors of energy, water and waste are emerging, providing specialist investors with new investment opportunities.
The steady migration of India’s rural population of over 800m to the cities makes the need to invest in transport, housing and sanitation even more pressing: 24% of city dwellers currently live in slums and many more have no access to clean water or sanitation facilities.
The Indian government is using its five-year plans to increase the infrastructure budget and encourage the ‘build-own-operate’ model. In late September 2010 it emerged that the government was also holding discussions with the Reserve State Bank of India for a debt fund that would buy bonds sold by infrastructure companies, to raise finances to build roads, ports and power plants. As a consequence, private sector investment in areas such as water supply, sewerage systems, storm water drainage, desalination, irrigation and renewable energy is growing rapidly.
Opportunity 1: Renewable energy
As the world’s fifth largest wind market, 11% of India’s energy is already derived from renewables. Government ambitions to raise this level are high, with targets for 15% renewable energy by 2020. Furthermore, feed-in tariffs for wind and solar have recently been introduced, providing innovative investors with the opportunity to achieve very attractive pre-tax equity IRRs of 19%. The government has also recently introduced Generation Based Incentives and Renewable Energy Obligations and Certificates to enhance the returns available and encourage a domestic market for independent wind power producers.
Greenko Group, one of India’s fastest growing independent power producers, is a direct beneficiary of these developments. Greenko currently operates 183MW of contracted capacity, including seven hydro and six biomass plants, and has a further 628MW of licences under development. With a broad geographic presence, diversified clean technologies and multiple revenue streams from both long-term power purchase agreements and short-term merchant sales, Greenko is ideally positioned to benefit from the acceleration in Indian renewable energy investment, and has recently announced a 200MW wind pipeline.
Opportunity 2: Water infrastructure
Over 70% of spending in the National Urban Renewal Mission is aimed at improving basic urban services like water supply, sewerage and storm-water drainage. This accelerated investment is creating exciting opportunities for companies such as VA Tech Wabag, one of the world’s leading suppliers of drinking water and wastewater plant design and engineering. VA Tech has 145 process patents and 39 under registration, and was recently listed on the Indian stock market.
Recent increases in pre-funded allocations means that VA Tech has less payment risk and therefore greater confidence in growing its government order book. In addition, the acceleration of growth in the power sector is enabling the company to increase exposure to the lucrative private sector as it is the only company active in India with the ability to offer complete power plant water management.
Opportunity 3: Sustainable agriculture
Despite the large influxes of urban migrants, more than 70% of India’s population remains rural and the pressure on farming resources is constantly intensifying. This is creating a huge opportunity for companies with innovative technologies that create a more sustainable farming process.
In 2004, the government began to subsidise Micro Irrigation Systems (MIS), which are ideal for allowing farming to continue in impoverished, resource stricken areas. The MIS market is now growing at 40% per annum, providing an expanded market opportunity for companies like Jain Irrigation, which has been operating in the Indian agribusiness market since the 1970s and is a pioneer and market leader in this rapidly growing area.
Along with supplying MIS, Jain help farmers to produce more and better quality produce by developing efficient water source management, and providing fertilisation and agronomical guidance. Jain’s average customer has less than 2,000 hectares of land and benefits immediately from an improvement in crop yield and wealth as water supply improves. Recent developments have been particularly positive for Jain: in June 2010, the government included MIS as part of its five-year plan, enabling Jain to achieve a top growth rate of 50% per annum in the MIS division.
Renewable energy, water infrastructure, sustainable agriculture - Indian environmental markets are evolving rapidly. The government has recognised the need to act quickly to provide the foundations necessary to support economic growth and the opportunities for pioneering Indian companies. Specialist environmental investors can benefit from these rapidly growing markets. The opportunities abound.
Kirsteen Morrison is an investment manager at Impax Asset Management