Business Today

Switching back to power

After spending years in a coma, the power sector has risen to embrace a life of multi-million-dollar deals. Who will be the last men standing?
twitter-logo Anilesh S Mahajan        Print Edition: February 1, 2015
Switching back to power
(Editing: BT Photo)

Arup Roy Choudhury may be in the last leg of his tenure as the Chairman and Managing Director of NTPC - he is retiring in 2016 - but he has suddenly been presented with the opportunity to leave a lasting imprint on India's largest power producer.

For, he is the power producer sitting on the biggest pile of cash - Rs 10,000 crore to be precise - at a time when distressed developers of power projects are queuing up to sell their plants. Choudhury expects to seal several deals and add more than 5,000 MW through acquisitions before he retires.

And he isn't the only one looking to pick up operating power plants. Tata Power's Anil Sardana, Adani Power's Vineet Jain, JSW Power's Sanjay Sagar, and Reliance Power's Anil Ambani are also on the prowl for assets that distressed sellers are trying to shed.

In the second half of the year gone by, these players have collectively signed deals to acquire 3,600 MW of power capacity, spending over Rs 23,000 crore to pick up these plants. Power deals account for roughly 11 per cent of the total $38-billion deals announced in this period.

It is a buyer's market out there. There are too many sellers, trying to hawk power plants they had built by taking on debt when the economy was doing fine. Now most of them are being prodded by their lenders to reduce debt, and they are desperately looking for buyers who will take some power plants off their hands. The last time NTPC put out a request for offer for any power plants with even partial fuel linkages, 31 power companies offered to sell 55,000 MW of capacity.

Tracking Takeovers
ho bought what from whom since August 2014
"We are doing due-diligence of seven power plants, and may end up buying two or three of them," says Choudhury. The plants with fuel linkages, he says, "?would allow a quick turnaround for the investments. Normally, a greenfield project takes four to five years to start commercial operations and bringing in returns. We expect these new purchases would allow quicker RoI [return on investment]."

In the past 10 years, as banks flush with funds looked to lend and power was seen as a great new growth area for infrastructure firms, a host of new players entered the sector. Nearly 50 new players jumped into the fray announcing roughly 500,000 MW of power projects by 2020. This is more than five times the capacity of private players currently. At an average debt-to-equity ratio of 3.1 times, it meant an additional Rs 4-5 lakh crore flowed into the sector. That was thanks to the excitement generated by the government's Ultra Mega Power Project plans.

Over the years, however, a tsunami of troubles hit the sector. First, land acquisition often delayed the projects, ballooning the project cost. Second, coal and other fuel supplies fell far short of projections and their linkages became even rare. For years, it seemed the sector was in a coma. Although India was adding roughly 20,000 MW annually, slow decision-making on coal and gas "messed" up the entire sector and many over-leveraged players found themselves in trouble.

As payback tenure increased, of late, panicky lenders began piling on pressure on borrowers to either complete their projects fast or exit them and pay off debts. As a result, the industry is overflowing with distressed assets available to anybody who is willing to put cash on the table. In the deal bazaar, the power sector is divided into two segments: sellers with weak balance sheets and those with cash or the balance sheet with enough leverage to make acquisitions.

In March last year, industry lobby group Assocham along with PwC India said in a report that stressed assets among state-run banks reached an alarming 112 per cent of equity. It also said that loans totaling Rs 6 lakh crore were stressed by the end of 2013 and that the power sector accounted for nearly a fifth of this amount. Troubled power companies went on the block once banks began pushing them to reduce debt. Banks had the support of the Reserve Bank of India (RBI). "It is wrong to expect the banks to take the haircut, the promoters should take the risk," RBI Governor Raghuram Rajan said in a recent TV interview.

These factors pushed the sector towards consolidation. "I was always of the opinion, eventually, there would not be more than four to five players with strong balance sheets in the power generation sector," says Deepak Amitabh, CEO of power trading firm PTC India.

WHERE IT ALL BEGAN

Consolidation kicked off in August when Gautam Adani -led Adani Power agreed to acquire the Udipi plant from Madhusudan Rao's Lanco Infrastructure (recent reports suggest the deal is getting delayed because the lenders are driving a tough bargain.)

Lanco Group is saddled with debts of roughly Rs 36,000 crore and had restructured its loans in December 2013. The group has a portfolio of more than 18,000 MW projects under operation and various stages of development, and is looking to sell most of this. "The pressure from the lenders is evident here," a banker says.

In February 2014, Lanco agreed to sell three hydel projects with total capacity of 80 MW in Himachal Pradesh. Investment bankers working with the company suggest another three plants are on the block. These projects are the 1,320 MW plant in Babandh, Odisha, 1,200 MW Anpara power plant in Uttar Pradesh and a 732 MW gas-based plant at Kondapalli in Andhra Pradesh. Adani, Reliance Power and JSW are among the potential acquirers who have shown interest in taking over these assets.

In November, Adani Power announced it will acquire a power plant from Gautam Thapar's Avantha Group. The same month, JSW Energy agreed to buy two hydroelectric projects from the Gaur-family promoted Jaiprakash Power Venture. The transaction is expected to complete by April. Sajjan Jindal-owned JSW has total capacity of about 11,700 MW under operation and various stages of construction. Sanjay Sagar, CEO of JSW Energy, told Business Today the group is evaluating projects to acquire roughly 3,000 MW thermal capacity.

Money Woes
Even the buyers have high debt and limited cash in hand
Incidentally, debt-laden Gaurs had previously made two other attempts to sell the plants. Just before JSW negotiations began, Gaurs were in talks with the Anil Ambani-led Reliance Power but the deal did not go through. In a parting statement, Reliance Power officials blamed the prevailing regulatory uncertainties and tariff issues for the deal's collapse. However, Gaurs refuted these claims. Reliance Power was keen to buy all three hydroelectric units, including the one yet not operational at Vishnuprayag in Uttarakhand. Here too, Adani was keen to invest, but consensus was not reached on the valuation. Prior to this, Gaurs negotiated for the same assets with a separate consortium led by the UAE's Taqa and IDFC Alternatives. Bankers tracking the sector say the entire power portfolio of Jaypee is on the block. But in a conversation with BT, Manoj Gaur, CEO of parent company Jaiprakash Associates, says they may not sell the entire portfolio and may come back in this sector.

The year ended with Tata Power announcing its intent to buy a power plant from D.P. Mhaiskar-led Ideal Energy. For Tata Power, which is undergoing restructuring, this purchase made a lot of sense. Ideal was on the lookout for buyers for three years, after it started facing a coal shortage. The first phase of 270 MW was commissioned and the second phase of the same capacity is delayed because of issues related to coal supplies. Tata Power officials say there is distinct advantage in buying plants like these. "The project draws coal from Coal India, and in times when captive mines are cancelled and importing coal makes projects vulnerable, these projects become more lucrative," says a Tata Power official. For the quarter ended September, Tata Power reported a loss of Rs 32 crore.

Meanwhile, Rajiv Rattan, Chairman of RattanIndia Power, rechristened his erstwhile company Indiabulls Power by taking over the entire stake from co-promoters Sameer Gehlaut and Saurabh Mittal in Indiabulls Infrastructure and Power, the holding company of Indiabulls Power. The market buzz is that NTPC and Adani are keen to buy his 1,350 MW Amaravati plant. "I am not that keen to sell it. We have built this power plant conservatively. Several decisions while erecting this plant were against the tide, but stood the test of time," he says. "We chose to install BHEL machinery when the buzzword was to bring equipment from China. We went for PPA (power purchase agreement) mode when most companies were going for merchant power. It is time for us to reap the benefits."

LIFE AT THE NEXT BEND

But why are some companies willing to spend thousands of crores when they are fully aware of the state of affairs in India's power sector ? For instance, despite several attempts, India is still to resolve the financial mess the last-mile distributors such as the state electricity boards continue to be in. Distribution companies are unable to align power tariffs with fuel costs as any such decision remains a political hot potato. This will continue to inhibit power producers in raising tariffs for distributors.

Second, even though Coal India has made ambitious projections about coal supplies to power plants in the future, its past record does not inspire any confidence in its ability to match those targets. Goyal says the entire government is working as a team to ensure Coal India meets the production target of 1 billion tonne by 2019. "Our targets are clear: double coal production by 2019 and double generation of electricity in next two to three years," he says.

In deep trouble
In deep trouble

Third, while these power projects are changing hands, it's not going to making any difference either to their own financials or the financials of the buyers. Acquirers may even have to pay higher interest on loans today than what the sellers paid at the time these projects were conceived five to six years ago when interest rates were lower.

It appears that most acquirers are buying these plants in the hope the government will deliver on all the promises it has been making. These include the commitment of adequate fuel supplies and improving the fiscal health of distribution firms. The buyers are also betting on an improvement in India's economic growth, which would lead to higher demand for power in the industrial sector. More importantly, they hope to give heft to their balance sheets with these assets so that they can leverage the consolidated balance sheet more substantially. Perhaps, at more affordable rates of interest.

Increasing Demand
Monthly power generation rose in 2014
Sagar of JSW says he is betting on faster GDP growth. For the Make in India campaign to happen, manufacturing to happen, India would require more electricity. India's per capita consumption of electricity is roughly 950 kWh. This is miniscule if we compare it with the US (13,500 kWh) and China (3,290 kWh). Besides, even today, 300 million Indians don't have access to power.

"Today the aspiration amongst consumers is high. They want good quality power 24X7. The states have started looking for reforms, and those who will not adapt will be left behind," Choudhury of NTPC says. But things can go wrong.

Two things are critical to 24x7 electricity: power producers' ability to charge market rates for tariff and distribution companies' ability to pass it on to consumers. Both of them are difficult to achieve. "The states would also have to think at the same frequency as the Union government is working. Else, it can derail the process," says the CEO of a private distribution company.

Electricity regulators in 22 of 29 states have issued tariff orders - correcting the price of power - for 2014/15 so far. The tariff orders for distribution utilities in Rajasthan and Tamil Nadu are delayed - both these states opted for financial restructuring in 2012. This is a deviation from the pre-conditions of the restructuring. But there is a silver lining in Madhya Pradesh's case. In 2009, the state was facing a shortage of 15 per cent and battling up to 14-hour power cuts. In 2014, the state met all its demand. And its electricity regulator projects the state distribution companies will start making profits in 2017.

Madhya Pradesh's transformation was enabled by its decision to change inefficient transmission equipment and, like Gujarat, segregate the subsidised farm load from the main feeder under the Atal Gram Jyoti Yojna. In 2010, the state assembly resolved to reduce transmission and distribution (T&D) losses from 37 per cent to less than nine per cent by the end of 2013/14. "The state government instead of taking help of the Union government (then UPA-2) did the financial restructuring itself," Chief Minister Shivraj Singh Chouhan told BT.

Officials say the state government provided support to the tune of Rs 2,306 crore to distribution companies. "This would help the distribution utilities in achieving a faster turnaround," an official said. This is one of the biggest turnaround stories in the distribution sector outside Gujarat. Union Power Minister Piyush Goyal has already agreed with Delhi, Rajasthan and Andhra Pradesh governments to resolve their issues, and is working with seven more states to usher in distribution reforms.

The power ministry is also pushing other states to segregate the agriculture load, under the Deen Dayal Gram Jyoti Yojna, and reduce T&D losses. Power supply to the farms is highly subsidised, and is not required round the clock. Also, in many states there are several cases of leakages as well. The segregation has helped states like Gujarat and Madhya Pradesh, among others, to meter these supplies and provide more power to higher paying customers like industries and households.

FUEL SUPPLY TANGLE

Power producers also run the risk of a fuel shortage. Goyal, who also heads the coal ministry, is devoting most of his time in pushing India's largest coal miner Coal India (CIL) to improve supplies. "If you have a company with consolidated assets, the rationalisation would help in ensuring better supplies of coal," says A.K. Khurana, Director General of the industry group Association of Power Producers.

Coal India will have to increase production from 463 million tonnes in 2013/14 to the targeted one billion tonnes by 2017. Goyal is throwing his weight behind putting the first lot of coal mines on e-auction. Many of these mines were among the 204 mines for which the Supreme Court cancelled licences in September. Goyal is also putting pressure on Coal India to increase output from existing mines. A former CIL chairman says new equipment and technology is being introduced in mining to boost production. "Plus, efforts are being made to increase surveillance and vigilance on 'coal mafia'," he says.

Inadequate improvement
Transmission and distribution losses have been declining but still remain high
Moreover, coal mining was stuck after the environment ministry under Jairam Ramesh declared various mines under no-go areas - dense forest areas where non-forest activities were not allowed. The biggest problem, says the former CIL chairman, was contradiction between coal and power ministries. "There was no synergy between officials," he says.

Many would now agree that with the appointment of the banker-turned-politician Goyal as minister for both power and coal, the Narendra Modi government has tried to resolve this problem. NTPC's Choudhury says, "I always thought that it was very difficult to look for an owner in a PSU. But not now. Today, we can sense there is an owner - the government - we can look up to."

J.P. Chalasani, ex-CEO of Reliance Power and now CEO of Punj Llyod group, agrees. "We know that the challenge is majorly in the fuel sector. There is focus on increasing investment in the transmission sector as well. The direction seems to be right," he says.

In the November cabinet reshuffle, there were three appointments the power sector was keenly watching. First, appointment of Suresh Prabhu as railways minister. Second, additional charge of the information and broadcasting ministry was taken from Prakash Javadekar and he was left with only the environment ministry to focus on. And third, appointment of Jayant Sinha as junior minister in the finance ministry. All these changes bode well for the power sector. All three are from Mumbai (Sinha was working in Mumbai as a partner with Omidyar Network before entering politics) and are comfortable working with each other, says a senior BJP leader. They can pick up the phone and easily talk to each other and resolve issues.

Prabhu's appointment was particularly interesting. Prior to his appointment as railway minister, he was heading an advisory panel of the power ministry. His two major recommendations -- swapping of coal linkage and installation of three vital rail links -- can unlock roughly 300 million tonnes coal by 2017. Now it's up to him to walk the talk. The railway lines have been delayed by a decade due to one reason or the other.

Javadekar, who initially was shying away from environment ministry, made favourable amendments in the guidelines for environment and forest clearances. These include provisions such as exemption of compensatory afforestation requirement for projects in states with more than 33 per cent forest cover (instead of 50 per cent earlier) of total geographical area, and decentralisation of the process of granting forest clearance to regionally empowered committees in case of projects such as transmission lines.

Sinha, meanwhile, is trying to work out taxation issues related to gas pooling, which may eventually help 23 gigawatt of stranded capacity to operate. Dharmendra Pradhan-led petroleum ministry had earlier worked out the formula of gas pricing and fixed it at $5.61 per million metric British thermal units, which might increase the cost of power generation by 17 per cent.

Kalpana Morparia, India head of J.P. Morgan, says the scenario is improving. "Players are able to raise money from the market. The companies are also able to sell assets in order to reduce the leverage," she says. Amit Kapoor, Partner at law firm JSA, believes that expectations are building up among investors. "They [the government] are taking decisions faster. The RBI's moves are positive. Globally, commodity and fuel prices are down. Demand is increasing. All these factors are making developments positive for investors," says Kapoor.

Former power minister Y.K. Alagh says the government has made a positive start. "Careful and alert supervision is required, so that the institutions don't lose the momentum," he says. The ball is clearly in the government's court. If it has to keep its promises to the people, the government will have to wade through the regulatory rigmarole and make it a win-win situation for both the power sector players as well as itself. Its failure to do so would sound the death knell for the ambitious investments.

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