Interest rate hikes don't just impact banks, but also ultramega power projects since the entire funding cost could go in for a rejig following the interest rates moving up.

CFO of Lanco Group, Suresh Kumar explains how interest rate hikes would affect their project.

Suresh Kumar informs that they had assumed 9.75% cost of funds at the time of the Sasan bid. He says that they have one year time to tie up funds. Kumar also adds that the company is in talks with both international and domestic lending institutions.

Moreover, he adds that JSPL has the option to up its stake to 49% in Sasan over time. Also, a mix of foreign and domestic debt will reduce the overall cost. Kumar believes that there will be a minimal effect of rate hikes on IRR.

Excerpts of CNBC-TV18's exclusive interview with Suresh Kumar:

Will you have to rework your funding cost numbers substantially in the light of interest rates going up quite a bit, changing your original assumptions?

Yes, when we bid for the project, we had assumed a 9.75% cost for the loans for the project. We have a time limit of one year to finalise the terms for the debt that we will take on for the Sasan project. We are actively watching; the way we see it is we have almost a 30-year window where we can optimize our interest cost not just during construction but also once the construction is over.

We have that interest rates cycle to ride and optimize throughout the life of the power project. Initially, in the short term, there is a possibility of a higher rate of interest for the project.

Just explain the structure though - what it stands at in terms of debt equity, what sort of stake you have and what stake JSPL has and who is the lead partner in this entire project?

We have a 51% option. We basically had an intent all along that we would like to own 51%, and the balance 49% will be taken up by Jindal in two phases. One is they have an existing right to take 28% and an option to reach 49% over the life of the project.

So you actually have to increase your outlay on the project significantly, since you now have to put in 51% atleast, it could also be 70% if JSPL doesn't exercise that option. At a higher interest cost, do you have recourse to funds like that - much larger outlay and that too at a higher funding cost?

All along we have been at 51%. The reason why Jindal is looking at an option to reach 49% is because they see the upsides in the project as well and they would like to commit over the requirement of the project. So the fact that they are also looking at an option of reaching 49% means that there is a potential upside that they want to also look at. As of now, we are looking at a 51:49 eventually.

Have you formalised the process for the debt side - we understand that PFC has written a letter to Globeleq asking what's happening with this joint venture?

We are in discussions with various lending institutions both international and domestic and we have time until April of next year to achieve financial closure. So we are working towards optimizing our cost of debt. If it is a good mix of international-domestic debt, there could be a reason to optimize the cost of debt.

Would it be fair to assume that you would now have to rework your IRRs (Internal Rate of Return) downwards in the light of the new reality of the structure and the funding cost in the market?

Not so much, because in the bid, we had assumed a higher rate of interest, so the risk of a further increase to that extent is minimised because almost a 9.75% cost was already assumed. If at all there is any increase in the overall blended cost of debt, then it may have a nominal impact on our IRR. But as I said, the interest rate cycle is not a three-year cycle, it is a much longer cycle for our project and we will face situations where we may participate in the interest rate upside as well.

Even so at 9.75%, what can you hope to do in IRRs?

It has a very minimal effect on our IRR because we have not factored their other upsides in our project. We feel that those upsides can more or less offset the increase in interest cost. For example, we have the benefit of carbon credits for this project, which have not been factored in a bid as yet and that is a good upside to the project, which will more than offset the increase in interest cost potentially.

Should your investors be worried at all that; there is even an outside chance of the Sasan project devolving to a Reliance Energy - the next bidder, because of the change in the Globeleq shareholding and the new shareholding structure?

I think that we have taken a step in the interest of the project; clearly like it does not jeopardize the project in any way. We have Jindal as an equally strong partner and our take is that the project is very much with us.

For more on markets & business, log on to www.moneycontrol.com.