Conglomerates on the lookout for distressed power assets

Mumbai: Expecting an upturn in the operating environment for India’s troubled electricity sector, large conglomerates are looking to buy distressed power assets that may be available at reasonable valuations.
Tata Group, Adani Group, JSW Group and Hinduja Group among others are seeking to increase their production capacity without having to set up new power plants, according to three persons familiar with their plans who spoke on condition of anonymity.
They want to acquire power assets that have an assured pipeline of fuel supplies, power sale agreements and approvals for land acquisition in plac

In 2013-14, power projects involving more than Rs.6 trillion of investment were shelved, abandoned or stalled, according to data from Centre for Monitoring Indian Economy. Around 100,000MW of power-generating capacity has been stuck for one reason or another as the economy weathered a two-year downturn that caused growth to slump below 5% levels.
Several of these power projects are also beset by cash flow problems, cost escalation and, in some cases, developers haven’t been able to make the required equity contribution.

In an attempt to revive projects that are basically viable, the government is pushing consolidation in the power sector. Last week, the government met with lenders and investment bankers along with power companies to seek potential buyers for stressed power assets, said one of the three persons cited above.

Large conglomerates are keen to buy some of these assets.
To be sure, their efforts are still at an exploratory stage, and potential buyers are taking their time to assess acquisition targets, analysts said.
After acquiring a 1,200MW power plant from Lanco Infratech Ltd in Udupi, Karnataka, for Rs.6,000 crore in August, the $9 billion Adani Group, controlled by Gautam Adani, is scouting around for more such assets, said a second person.
“Adani Group is actively scouting for power assets of over 1,000MW. The idea is to consolidate the power business of the group and create additional capacity without going through tedious greenfield route,” the person said.

Adani Power Ltd is targeting a doubling of its power production capacity to 20,000MW by 2020.

A spokesperson for the Adani Group declined to comment for this story.

In September, Sajjan Jindal-controlled JSW Energy Ltd said it will buy three hydropower projects from Jaiprakash Power Ventures Ltd (JPVL). The portfolio comprises Baspa Stage II (300MW) and Karcham Wangtoo (1,091MW) in Himachal Pradesh, and Vishnuprayag (400MW) in Uttarakhand.

The sale of the hydropower projects was critical to the Jaypee Group’s efforts to pare debt of around Rs.60,000 crore. It will help JSW Energy expand its power portfolio.

The Economic Times reported on 4 November that a joint venture of Tata Power Ltd and private equity firm ICICI Venture Ltd had begun talks to buy out some power assets from Avantha Power & Infrastructure Ltd as the cash-strapped Avantha Group considers asset sales to reduce debt. The joint venture aims to shop for power assets stranded due to regulatory uncertainties, fuel supply disruptions, low demand and high debt.

“We will not comment on market speculations,” said an Avantha Group spokesperson. Tata Power and ICICI Venture declined to comment.

Harish H.V., partner at consultancy firm Grant Thornton India LLP, said that in a number of cases developers were looking to exit delayed power projects. Larger companies may be willing to look at buying such assets in the hope that hurdles faced by these projects may be removed by the new government.

“The new government has increased optimism of revival amongst major players in the sector with several measures,” he said. “The government is also keen for many of these projects to be implemented, and the existing promoters are not able to do so. The combination of these factors is what is driving the deal environment in this market. Banks are also willing to be flexible on the loans as this gives them a better ability to recover money.”

In a September interview, Gopichand P. Hinduja co-chairman of the $25 billion Hinduja Group, said the group had set aside $10 billion for buying out distressed power and road projects that have already secured necessary clearances. The group has already asked two investment bankers to find suitable infrastructure projects to invest in, he said.
Kameswara Rao, leader of the energy, utilities and mining practice at PricewaterhouseCoopers Pvt. Ltd, said the prospects for mergers and acquisitions in conventional power were looking up due to availability of distressed assets, interested buyers and an improvement in sentiment.

Rao cautioned that arriving at a proper valuation remained tough. “Buyers are taking time to closely assess the contracts, and may not be able to conclude on a sale value or recourse within their exclusive (negotiating) period,” he said. “So the flurry of activity we see should not be mistaken for outcomes. The government must strengthen the regulatory framework to deal with distressed assets before lenders and buyers warm up to it.”

The article appeared in Mint. The article can be found here.