Can you tell us about your new energy fund?
The Sundaram BNP Paribas Energy Opportunities Fund covers stocks that focus or benefit (directly or indirectly) from opportunities and developments in the energy sector. It is a thematic product focusing on the growth opportunities in the emerging Indian energy landscape. The broad key areas would be oil and gas, coal and power generation, renewable energy and infrastructure support services for setting up and maintaining the facilities.
When you say sectors that would directly or indirectly benefit from the energy sector, which ones are you referring to?
There are four categories of players in the investment universe spanning the energy value chain.
Resource providers include oil and gas, power and alternate sources of energy such as solar and wind power.
Enablers will provide the exploratory services such as seismic and geological studies, compression and drilling services, offshore supply logistics, engineering support services, gas stations and engineering and logistics that will be required to support facilities on an ongoing basis.
Beneficiaries or the users in energy-intensive sectors as they take advantage of abundant availability of gas/power priced at a competitive level. Finally, indirect demand beneficiaries in terms of capital goods and EPC companies who would supply into the energy value chain.
Your mobilisation on this fund has been huge. How big a drag will the initial issue expense of 6 per cent be on the fund?
The initial issue expenses and its effects have been made clear to investors upfront. Over the long-term, at least three years, and preferably, five years or more, we expect the strength of the theme to more than adequately compensate investors with returns that compare favourably with the broad market.
The demand-supply gap in the entire energy gamut would take longer to get bridged as the acceleration of investments in the energy sector has been happening only over the past few years. On an incremental basis, reforms should be focussed on speeding up investments and incentivising faster completion of projects.
The Indian consumer pays one of the highest prices for energy in Purchasing Power Parity terms when compared with countries like US, China, Japan. What changes must take place to see these prices drop?
We do expect energy prices across the spectrum in India to become competitive from a user standpoint as our domestic supply of oil and gas increases. Setting out clear priorities towards use of natural gas and free pricing of products would help. The administered price mechanism prevalent in some of the fuels should slowly morph towards market pricing. Any subsidy should get administered directly to the consumer rather than through the producer/seller.
Only public sector units are allowed to mine coal for non-captive purposes. Private sector is allowed to for captive consumption and that too only in small and isolated pockets of coal deposits. Do you see a change?
This should change in the medium term. We definitely expect the government to free up the coal sector for private participation for commercial purposes by evolving a public-private-partnership model - known as the PPP model - that ensures priority sectors are not deprived of coal supply.
Do you feel that the absence of a level playing field and that of a coal regulator is hindering the growth of the industry?
As we progress towards completely opening up the sector to private participation, a regulatory body would be essential for a smooth transition.
We do not wish to comment on specifics within the sector.
Over the past few months, power stocks have risen sharply. What do you think is the reason for this spurt in prices?
A favourable view on emerging changes in the macro-policy environment and expected investment outlay.
Do you think GAIL will grow significantly in its volume of gas transmission from its agreement with Reliance Gas Transportation Infrastructure?
We do not wish to comment on a company-specific question.
You are bullish on the energy sector. What is the core story and the peripheral story?
The core story is the likely landscape change linked to multiple triggers in energy over the long term. The peripheral story is opportunities linked to this landscape change with a payoff that is at the front-end of the theme.
What do you think is driving the sector?
The government is steadily moving away from being an implementer to an enabler in many sectors, including energy, given its emphasis on socio-economic priorities and the massive resources.
The PPP model is being leveraged across various sectors including energy to provide the infrastructure platform for the Indian growth story.
What are the challenges you see in this sector?
Policy clarity and possible execution risks.
Delays and slower pace of commercialisation of gas and oil finds; government policy on distribution of petro-products in the near term; significantly lower commercial output in relation to the size of the oil or gas discovery; geo-political developments and any government intervention in pricing at a later date; and slower-than-expected pace of development and usage of oil and gas in user industries.
Even if one or more of these risks play out, the long-term impact will be marginal.
Does the slow pace of reforms in the energy sector concern you?
The government has been progressively accelerating the pace of reforms. If you consider the upstream oil and gas sector, the New Exploration Licensing Policy and its progress on 6-7 NELP rounds is a testimony.
Consider the coal and power generation space, progress is being made over the past few years in terms of coal allocation and ultra-mega power projects, to name a few.
What reform would you like to see in the immediate future?
Clear policy on gas transportation, city gas business, fertiliser feedstock and subsidies.
This interview appeared in January 2008 Issue of Wealth Insight.