A Pleasant Surprise on the Upside!

While redoing our website, I accidentally stumbled upon an interesting piece of information.

I wanted to create a portfolio filter that would allow a visitor to create portfolio cohorts using factors such as the year of our investment, whether we were current investors, which startups we had exited from, or which sector the startup operated in and so on.

While tagging the startups, my team discovered that 4 of Artha Venture Fund’s portfolio companies had at least 1 female founder, i.e., 66% of the fund’s portfolio! This statistic piqued my interest as I stress the importance of being gender-neutral when it came to choosing our founders. Yet our female founder representation was far higher than the 20% female founder representation reported in CrunchBase EoY 2019 Diversity Report published in January 2020.

I dug further to look into our upcoming pipeline, which told me that out of the 5 deals which were at an advanced stage of closure, 3 deals had at least 1 female in the founding teams – 2 where the female founders held the CEO position!

I still felt that my sample size was too small to form an opinion. So I widened my search. My team & I started an investigation into my previous portfolio that I had set-up through our family office, i.e., Artha India Ventures.

The team keeps granular information on my past performance to report to institutions and family offices that need the information as a part of their due diligence. It took a few hours to figure it out, but 22 out of the 69 startups I had previously invested in had one female founder, i.e., almost a 33% representation!


The team went deeper to uncover that the female founder cohort delivered a 41% IRR with 4.3x multiple on invested capital in comparison to an overall portfolio IRR of 56% with a 4.6x investment multiple. Though the female cohort performance is lower than the overall performance; it does not tell the entire picture.

Our 330x multiple in OYO skews the numbers in favor of the XY chromosome cohort, but several of our female founder companies are raising new rounds of capital. One of them is months from becoming a unicorn, so it is a matter of when (not if) when the female cohort will be the alpha for the portfolio. While an eye-opener, I am not proud of beating the gender bias – not this way.

What I am proud of is that diversity happened without gender bias in favor of the XX chromosome. I am very vocal in stating that we do not favor a particular gender in our employees or founders. I believe that being entrepreneurial is a gender-neutral trait, and to invest in someone because they have or lack a Y chromosome is foolhardy.

Despite these results, I continue to stand up for what I said in last year’s blog post, Why I refuse to promote Women’s Entrepreneurship. 

The moment that I start treating a founder differently because they are women, it means that I do not see them as equals. I will skew my thoughts to cater to my bias, and it will hurt them as much as it will hurt my bank balance.”

To investigate if my lack of bias was something I felt or did it percolate down to our treatment of our female founders, I asked my XX founders whether they felt any bias from our end. Besides, I asked them why they gave a seat to Artha for their entrepreneurial journey. This is what they had to say:


WhatsApp Image 2020-03-09 at 7.24.53 PM

The diversity of the artha eco-system is felt in all the events we come together with Artha- where we meet entrepreneurs working on awesome ideas - pushing through- without feeling any differenc

In closing, while global reports state that the penetration of female founders in startups is very low, I have little concerns for the same. People whose investment lens has a filter against a particular group of people due to their color, country, or chromosome will lose out – lose big.

I am glad that our lens is crystal clear and that my team chooses the best people for the founder’s job. We follow an incredibly meticulous approach when it comes to choosing our founders.

Not always do we have the most qualified founders, but we attract the most passionate founders’ with a deep internal drive for the problem they are solving. We trust in our process of channelizing a founder’s energy to win one battle at a time and create category-leading companies.

Now if that means that our winning portfolio has a disproportionately high number of female founder companies – then so be it!

A Holocaust of Renewable Energy Investors in India

It has been over 12 months since the we have received a payment from our energy consumer, Ajmer DISCOM – owned by BJP led Rajasthan government. The outstanding payments (now) add up to 20% of what we paid for the asset!Luckily my investors paid in full for the asset so there weren’t any loans to repay but not every renewable energy generator was as lucky as me, many took loans, have run from pillar to post to get paid and after exhausting all available options they have finally been forced into looking at other avenues to repay the loans. The gut wrenching stories range from mortgaging familial properties, dipping into their savings or in worst cases selling property to keep the loans current – this is the state of renewable energy investors in India, a population that is dying under the weight of the outstanding dues.
I used to assure my investors that the invoices are with a government entity that has to pay penalty interest of 15% on the past due amounts which is as good as keeping the money in a high yielding bond. My faith was vindicated last year when, under the direct order of the Rajasthan High Court the DISCOMs immediately paid the delayed interest amounts and I (like many others) did get the money!
This year however, the DISCOM is extracting more than it’s pound of the generators flesh by

  1. Withholding payments to generators even though it has received funds from the Central Government under the UDAY restructuring scheme 
  2. Asking renewable energy generators to back down their substations when they are in the middle of producing their maximum energy 

The investors have been living with these issues for years now and most of those risks have been priced into the financial models for these projects. The blow that broke the camels back is the DISCOM newest filthy proposal: sign an undertaking giving the DISCOM a 50% interest discount otherwise wait indefinitely to get paid.

Yes, ladies and gentlemen, you have read it right – the debtor is offering the creditor an amnesty scheme!

The 50% discount would mean that

  1. The interest paid to the bank (around 10-12%) is higher than the interest received from the DISCOM 
  2. It ss less than the yield of 12 month fixed deposit at a nationalised bank  

This leads to a negative IRR situation for the investor!

Does the Narendra Modi government intend on building its 100 GW plan on the carcasses of renewable energy investors? The banks don’t want to lend to this sector, the investors don’t want to invest new capital in this sector and it is easier for me to find people who want to sell their renewable power projects than those that want to buy them.
The PMO and the Ministry of Power is fully aware of what is going on because just last week we received a letter from the Maharashtra DISCOMs offering the Rajasthan amnesty scheme to its creditors… the model is here to stay and will be replicated till all renewable energy investors have been gassed into oblivion.

The sun is setting quickly on renewable energy investors in India

Decoding Sun Edison's Record Bid for Selling Solar Power in India – Realistic or Wildly Optimistic? (Part 1)

The recent brouhaha over Sun Edison’s record low bid of selling solar power at Rs. 4.63 per kWh has shaken up the entire solar universe (which just 3 GW in size… by the way) in India. On November 9th an article in the Business Standard mentioned that
there is nervousness among investors in the segment and the supply chain. Experts say leading project developers are putting aggressive bids for 50-200 Mw projects, to be relevant in the market
I am personally quite surprised at the record low rates that have been achieved. It is easy to appreciate that there has been very little (if any) progress with the financial institutions lending to this sector. Banks don’t bat an eye lid when asking for an arm, a leg and your dog’s kennel as collateral or putting deals through committee after committee while the project owner suffers. There was a brief ray of hope for investors when panel prices dropped below 50 cents per watt but a rapidly devaluing rupee nuked the opportunity created and the panel prices remain firm on a rupee level.
So when the reverse bidding prices for the sale solar output start touching record lows without much changing on the input sides – it intrigued me to further investigate how these projects made financial sense for investors.
Instead of assuming a certain project cost and then getting an IRR based on the bidding done by Sun Edison I decided to and was encouraged to (by a senior executive at a leading EPC) to  reverse calculate the project cost by using the tariff as the final product and taking CERC or market accepted levels of return for such projects to find out the truth for myself.
First I refurbished a worksheet that I found online on www.IndianPowerIndustry.com and utilised by the website for “Calculation of Solar Power Tariff”. The sheet is quite comprehensive but I found a few errors both clerical & logical that I corrected and figured that for a bid of Rs. 4.63 to make sense the project cost would have to be about Rs. 4.40 crore per MW (all inclusive).
The assumptions made were (all figures are in lakhs of rupees) :

Project Capacity MW 500 Return on Equity for 1-10 years Per Annum 18%
Annual Energy Production Lac Kwh 8322 return on Equity for 11-25 years Per Annum 22%
Total Project Cost Rs. Lac 440 Depreciation till loan repayment 5.83%
Project life Years 25.00 Depreciation after loan repayment 1.54%
Equity to be Invested Rs. Lac 66000 Total O&M expenses for 1st year 4000
Loan Component Rs. Lac  1,54,000 Escalation in O&M Expenses 5.72%
Loan repayment period Years             15 Discount Rate 9.88%

Please note: The discount rates input of “Return on Equity”  was 16% (post-tax) as per CERC guidelines. So the final calculation was (70% x 11% x (1-33.99%) + (30% x 16%) = 0.0988
The final calculations were (all figures are in lakhs of rupees):

Year 1 2 3                4                5                6                7                8                9             10             11             12             13             14             15             16             17             18             19             20             21             22             23             24             25
Energy Sold (degrading by 0.84% per year) 8322  8,252.10  8,182.78  8,114.04  8,045.88  7,978.30  7,911.28  7,844.83  7,778.93  7,713.59  7,648.79  7,584.54  7,520.83  7,457.66  7,395.01  7,332.90  7,271.30  7,210.22  7,149.65  7,089.60  7,030.04  6,970.99  6,912.44  6,854.37  6,796.79
O&M Expenses (includes OPEX) 4000.0 4228.8 4470.7 4726.4 4996.8 5282.6 5584.7 5904.2 6241.9 6598.9 6976.4 7375.5 7797.3 8243.3 8714.9 9213.3 9740.3 10297.5 10886.5 11509.2 12167.5 12863.5 13599.3 14377.2 15199.6
Principal Repayment 10266.7 10266.7 10266.7 10266.7 10266.7 10266.7 10266.7 10266.7 10266.7 10266.7 10266.7 10266.7 10266.7 10266.7 10266.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Interest on Term Loan 16422.4 15293.1 14163.7 13034.4 11905.1 10775.7 9646.4 8517.1 7387.7 6258.4 5129.1 3999.7 2870.4 1741.1 611.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Return on Equity (Pre-Tax) 11880.0 11880.0 11880.0 11880.0 11880.0 11880.0 11880.0 11880.0 11880.0 11880.0 14520.0 14520.0 14520.0 14520.0 14520.0 14520.0 14520.0 14520.0 14520.0 14520.0 14520.0 14520.0 14520.0 14520.0 14520.0
Total Outflow 42569.1 41668.5 40781.1 39907.5 39048.5 38205.0 37377.8 36567.9 35776.3 35004.0 36892.1 36161.8 35454.4 34771.1 34113.2 23733.3 24260.3 24817.5 25406.5 26029.2 26687.5 27383.5 28119.3 28897.2 29719.6
Cost per Unit of Electricity 5.1 5.0 5.0 4.9 4.9 4.8 4.7 4.7 4.6 4.5 4.8 4.8 4.7 4.7 4.6 3.2 3.3 3.4 3.6 3.7 3.8 3.9 4.1 4.2 4.4
Discount Rate for Net present Value 0.099
Discount Factor 1.0 0.9 0.8 0.8 0.7 0.6 0.6 0.5 0.5 0.4 0.4 0.4 0.3 0.3 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.1
NPV of Cost per Unit 4.65
Therefore Tariff (Rs./Kwh) 4.65

I also devised an alternate sheet of my own which wasn’t as comprehensive as the one created by  IndianPowerIndustry.com but was based on IRR versus NPV. In this approach I estimated the investment cost by charting out the net cash-flow at the project level and hitting a target IRR (14% post tax) at the project level.

Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Generation 8760 8686 8613 8541 8469 8398 8328 8258 8188 8120 8051 7984 7917 7850 7784 7719 7654 7590 7526 7463 7400 7338 7276 7215 7155
Tariff ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63 ₹ 4.63
Revenues ₹ 40,559 ₹ 40,218 ₹ 39,880 ₹ 39,545 ₹ 39,213 ₹ 38,884 ₹ 38,557 ₹ 38,233 ₹ 37,912 ₹ 37,594 ₹ 37,278 ₹ 36,965 ₹ 36,654 ₹ 36,346 ₹ 36,041 ₹ 35,738 ₹ 35,438 ₹ 35,140 ₹ 34,845 ₹ 34,552 ₹ 34,262 ₹ 33,974 ₹ 33,689 ₹ 33,406 ₹ 33,125
O&M -₹ 3,000 -₹ 3,172 -₹ 3,353 -₹ 3,545 -₹ 3,748 -₹ 3,962 -₹ 4,189 -₹ 4,428 -₹ 4,681 -₹ 4,949 -₹ 5,232 -₹ 5,532 -₹ 5,848 -₹ 6,183 -₹ 6,536 -₹ 6,910 -₹ 7,305 -₹ 7,723 -₹ 8,165 -₹ 8,632 -₹ 9,126 -₹ 9,648 -₹ 10,199 -₹ 10,783 -₹ 11,400
OPEX -₹ 1,000 -₹ 1,057 -₹ 1,118 -₹ 1,182 -₹ 1,249 -₹ 1,321 -₹ 1,396 -₹ 1,476 -₹ 1,560 -₹ 1,650 -₹ 1,744 -₹ 1,844 -₹ 1,949 -₹ 2,061 -₹ 2,179 -₹ 2,303 -₹ 2,435 -₹ 2,574 -₹ 2,722 -₹ 2,877 -₹ 3,042 -₹ 3,216 -₹ 3,400 -₹ 3,594 -₹ 3,800
Cash Before Tax ₹ 36,559 ₹ 35,989 ₹ 35,410 ₹ 34,819 ₹ 34,216 ₹ 33,601 ₹ 32,972 ₹ 32,329 ₹ 31,670 ₹ 30,995 ₹ 30,301 ₹ 29,589 ₹ 28,857 ₹ 28,103 ₹ 27,326 ₹ 26,525 ₹ 25,698 ₹ 24,843 ₹ 23,959 ₹ 23,043 ₹ 22,095 ₹ 21,111 ₹ 20,090 ₹ 19,029 ₹ 17,926
Effective Tax Rate 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%
Tax ₹ 3,656 ₹ 3,599 ₹ 3,541 ₹ 3,482 ₹ 3,422 ₹ 3,360 ₹ 3,297 ₹ 3,233 ₹ 3,167 ₹ 3,099 ₹ 3,030 ₹ 2,959 ₹ 2,886 ₹ 2,810 ₹ 2,733 ₹ 2,652 ₹ 2,570 ₹ 2,484 ₹ 2,396 ₹ 2,304 ₹ 2,209 ₹ 2,111 ₹ 2,009 ₹ 1,903 ₹ 1,793
Net Cash Flow(s) -₹ 2,00,000 ₹ 32,903 ₹ 32,390 ₹ 31,869 ₹ 31,337 ₹ 30,795 ₹ 30,241 ₹ 29,675 ₹ 29,096 ₹ 28,503 ₹ 27,895 ₹ 27,271 ₹ 26,630 ₹ 25,971 ₹ 25,293 ₹ 24,593 ₹ 23,872 ₹ 23,128 ₹ 22,359 ₹ 21,563 ₹ 20,739 ₹ 19,885 ₹ 19,000 ₹ 18,081 ₹ 17,126 ₹ 16,133
IRR 14.14%

In both models the total project cost I arrived at is between Rs. 4 – 4.40 crore per MW. Now comes the really important part… is that cost realistic or attainable?
So the few things that are constant in such projects are:

Interest free Performance Guarantee Deposit Rs. 10 lakh per MW
One-Time Solar Park Development Expenses Rs. 42 lakh per MW
Service Tax & Other Taxes which I will estimate at 5% of project cost Rs. 20 lakh per MW
Panel investment* Rs. 297 lakh per MW
Inverter Rs. 20 lakh per MW
Total = 389 lakhs or 3.89 crore per MW

*Panel costs (this is the tricky piece) for a project of this size should be quite low.. Below market quoted prices for sure. I estimated them to be $0.42-0.44 per watt. However with 30% of the capacity under the DCR category it is my estimation that the average per watt procurement cost will be $0.45 per watt. You can argue that the panel prices may/will fall 10% in 12 months i.e. when they are needed. I would say that the rupee will most like devalue 10% by that time as well negating the gains made in panel procurement cost. Lastly one should also note that a significant percentage of these modules are to be sourced from Indian Panel manufacturers who charge  a premium to international rates.
Even if I take the average of the “derived project cost” I get 4.20 crore per MW as my project cost.. Deducting the break-up above I get a balance of 31 lakhs per MW to cover the remainder of my expenses which are:

  1. Balance of Plant Investment
  2. Transmission Investment
  3. Labour Costs
  4. EPC Margin (this goes to Sun Edison if they do their own EPC)
  5. Project Monitoring Costs
  6. Legal Costs
  7. Equipment transportation
  8. Financing costs like:
    1. Processing fees
    2. DSRA
    3. IDC
    4. Bank Guarantees
    5. EMD Costs
  9. Stamp Duties & other taxes

Do you think that 31 lakhs can cover all this?

Cross Subsidy Surcharge: A Dacoit in Robinhood’s Clothing

Robin Hood
The verb “cross subsidize” as defined by the Oxford dictionary is “Subsidize (a business or activity) out of the profits of another business or activity.” But what happens if that industry is facing the awesome prospect of losing $27 billion per year from 2017 onwards as reported by the World Bank? To put the number of $27 billion into perspective, it is equal to the entire nominal GDPs of Nepal and Zimbabwe… combined!
In my honest opinion the in-sync folks at Wikipedia have defined “cross subsidization” aptly, as “the practice of charging higher prices to one group of consumers in order to subsidize lower prices for another group.” When I read that definition is immediately reminded me of a heroic outlaw in English folklore, Robin Hood, who is famously known for “robbing from the rich and giving to the poor”. In this post and the many more that I intend to write, it is my intention to bring to your attention the malaise that has spread in the Indian Power setup from the introduction and the subsequent revisions in what many of us see as a harmless line item in our electricity bills.
The current scenario in the Indian power sector is very grim when one concentrates on the sheer magnanimity of the numbers.

  •  India possesses the 5th largest power system in the world
  • 21% of the power generated by the India power generation companies is lost during transmission
  • Bangladesh loses a mere 10% in comparison
  • A World Bank report on June 24, 2014 stated that more than 300 million Indians (the entire population of the United States) still live without electricity today
  • 200 million of them live in villages that are supposedly “electrified”
  • The same report also stated that the sector was bailed out in 2011 with 1,90,000 crores
  • That number exceeds the GDP of Bahrain by 10%!
  • The sector was bailed out in 2001 with 35,000 crores of the tax-payers money

These poor metrics and massive bailout could have all been forgotten if the sector was aiding in “amp”ing up India’s GDP but when a FICCI report in 2013 points out that India loses $68 billion or Rs. 4,14,800 crores of its GDP due to power outages – it is time to sit up and take notice.
In my opinion the CSS (short form for Cross Subsidy Surcharge) is a dreaded dacoit that keeps raids the rich to buy narcotics and give it for free to the poor which give them the temporary high but the dacoit maintains its stranglehold. It should be noted that CSS was introduced by the previous BJP government when it passed the Electricity Act of 2003 and opened the power sector for competition. The intention at that time was to give the government run power companies some compensation for losing its customer base to cheaper and more efficiently run private power producers while they restructured themselves for this competition.
However this well intentioned move, atleast in hindsight, acted like treating a heroin addict by feeding him some more heroin and asking him to cure himself by reducing the amount of heroin he takes… such an approach rarely works! The government run entities latched on CSS like a lifeline and 6 years after CSS was to be abolished it is being used as a ploy to keep out competition and to harass consumers of power that can get cheaper power but that will not be in the best interest of the utility. The utility will tell you that they need CSS to provide free or low cost power for the agriculture sector and residential consumer but subsidization for one industry while upsetting the apple cart for all other industries is preposterous if not just plain illogical.
In certain states CSS is more than the cost of making power! For example TANGEDCO now charges a CSS of Rs. 3.40 to Rs. 3.61 per kwh while Maharashtra charges a CSS of Rs. 2.30 to Rs. 2.75 per kwh and both have increased their CSS in the last year. To see how ridiculous and anti-competitive these tactics are, just open the last annual report of Tata Sponge as available on its website. Their cost of power when they generated it for themselves was Rs. 1.47 but when they buy it from the open market or the utility the cost is upwards of Rs 8 – a large chunk of it attributable to the enormous CSS charges that are forced onto the customers.
This anomaly has led to a deathly downward spiral, one where the large users of power find it more feasible to own and operate captive power plants versus buying power from the open market or the utility. This leads to loss in valuable and profitable revenue for the entire industry – the power generator, the power transmission utility and the power distribution utility. The 3 are then stuck with power consumers that get power ridiculously cheap and below cost rates ranging from 0 (yes nada) to Rs. 2 per kwh and in the effort to balance their budgets they have to keep increasing the CSS charges and therefore driving out competition and customers too. This also has an adverse affect on inflation as electricity is a key cost for most industries.
In conclusion new government would serve the nation by ending this madness and abolishing the practice of CSS once and for all. If states want to subsidize power for residential and agriculture they should use their state subsidies budget to do the same and not lay the burden on other industries by charging them what is in effect an agricultural tax. Abolishment of CSS will give power and other industries the much needed shot in the arm (pun totally intended) to spur growth in the industry through an increase in power generation plants which will increase long-term employment and generate an affordable and growth filled future for our country.

Electricity Prices Set to Increase by 35 Percent!

A perfect storm for electricity consumers that was created by the policy paralysis of UPA-II, high interest rates and the slow pace of development of power plants as developers faced innumerable headaches and delays in securing 143 licenses and filing 1982 compliance reports. This storm will reach devastating strength as the states of Delhi, Punjab, Rajasthan, Chhattisgarh, Uttar Pradesh and Karnataka have decided to raise power tariffs by 10 to 35 percent!
The problems in India’s critical power sector have been simmering below the surface for a very long time and the burgeoning Indian population with its increasing usage of technology – from using smartphones to rural electrification schemes that has increased power consumption from 443 kwh per capita in 2004 to 684 kwh per capita in 2011 as per the data compiled by the World Bank.
The problems being faced by the Indian power sector are too many to list out in a single blog post but as a power consumer we should all beware that such large hikes in tariffs are going to be the norm moving forward – unless the government makes some serious and immediate changes to its power policy. If the government is serious about giving world class power infrastructure for supporting the needs of residential and commercial customers, it first has to ensure that setting up a power project is a pain free and an under-table ridden process.
The government should also seriously give a thought to replacing the defunct and often misused depreciation and subsidy based schemes and give power plant developers access to easy, low-cost and long-term debt. Climate Policy Initiative studied the impact high interest costs have on power tariffs, noting that unfavourable debt terms add as much as 32% to the cost of renewable power from wind energy alone! One can only imagine what an impact the adoption of business friendly policies would have on procurement cost of other sources of power. The same report also mentions that access to cheaper debt can reduce the subsidy burden of state and central governments by upto a whopping 78% just for wind power alone!
So while highly recommending power consumers to urge their local representatives in the power corridors (pun not intended) of Delhi to give the neglected power producers the support they need, I also recommend that the power consumers who have an empty roof-top, should look at sourcing their power from distributive solar power generation systems. These systems can provide the consumer access to long term solar power at an affordable and sustainable tariff while giving them valuable ‘day-time’ power – a time when most power distribution companies face tremendous power shortages.
More on that soon…