The prolonged inactivity in the debt-laden, fuel-starved and bankrupt power sector finally seems to be ending with two large acquisitions announced in the last few weeks. First, Reliance Power, promoted by the Anil Dhirubhai Ambani Group, acquired three operational hydropower assets from the Jaiprakash group for upwards of Rs 10,000 crore. Then Adani Power of Gautam Adani bought Lanco's 1,200 Mw power plant at Udupi in Karnataka for an enterprise value of nearly Rs 6,000 crore. The deals come on the back of state-owned NTPC, India's largest power generator, receiving at least 30 proposals in response to its offer to buy projects which could be "operational, commissioned, under construction or under planning". NTPC is sitting on a cash reserve of Rs 17,000 crore and is expected to leverage that to make acquisitions worth Rs 25,000 crore to Rs 30,000 crore.
Earlier in February, Singapore's Sembcorp Utilities had bought a 45 per cent stake in a 1,320 Mw thermal power plant being built by NCC Power Projects at Nellore in Andhra Pradesh. Last December, GDF Suez of France acquired 74 per cent in a 1,000 Mw thermal power project operated by Meenakshi Energy in Andhra Pradesh.
Power sector acquisitions since 2013
Over the past few years, numerous power projects had become unviable because of fuel (coal and natural gas) shortages. The demand too had slumped due to the prolonged economic slowdown. The sector has contributed in a big way to the non-performing assets of banks. The irregularities in the allocation of coal blocks during the United Progressive Alliance government made financiers uneasy. With the Narendra Modi-led government at the Centre promising to deal with the policy paralysis that had impacted fuel supply and the pace of land and environment clearances, the sentiment was bound to improve. It was dampened somewhat today after the Supreme Court declared all coal block allocations after 1993 illegal. All power stocks fell after the news of the judgment broke out.
Sentiment on the mend
In the revival of the sector, the Jaiprakash group and Lanco saw an opportunity to sell. Jaiprakash Power Ventures has over Rs 24,500 crore of debt on its balance sheet, while the group's total debt is nearly Rs 60,000 crore. A consortium led by Abu Dhabi's National Energy Company had announced in March it was acquiring Jaiprakash Power Ventures' two hydroelectric plants that can produce 1,392 Mw. Though no official reason for cancelling that deal was given, the company probably got a better valuation four months later. After all, apart from Reliance Power, Adani Power and JSW Energy of Sajjan Jindal were also in the fray. This time, Manoj Gaur, the promoter of Jaiprakash Power Ventures, threw in another plant into the deal, which meant Reliance Power bought capacity of 1,800 Mw. Reliance Power's capacity is slated to increase to 7,800 Mw by 2015. Lanco has a group debt of over Rs 35,000 crore. The sale of the power plant is aimed at unburdening the company's balance sheet. Post the deal, Adani Power's generation capacity will be ramped up to around 9,800 Mw.
Factors related to the fundamentals of the sector seem to have contributed to the renewed investor interest. India added over 55,000 Mw to its power generation capacity in the last Five-year Plan (2007 to 2012) against a target of 62,000 Mw. This was followed by capacity addition of over 20,600 Mw in the first year and 17,800 Mw in the second year of the current Five-year Plan (2012-17). In the current financial year, more than 4,998 Mw has already been added between April and July - almost double of the 2,500 Mw capacity added in the corresponding period last year. The pace of capacity generation has picked up due to renewed economic activity that has pushed power demand growth by over 9 per cent to 148,166 Mw in the current year. Last year, growth had remained flat. With improved generation this year, peak deficit slumped to 5.1 per cent in April-July against 6.3 in the same period last year.
The numbers on the fuel side, a major irritant for power sector investors, are also looking up. State-owned Coal India (CIL), whose output levels were once stagnant, produced 141 million tonne (MT) of coal in the April-July period, recording growth of 4.1 per cent. CIL, which produces more than 82 per cent of the domestic coal, meets the fuel needs of almost all the operational coal-based power assets. For those projects still awaiting fuel supply, the new government has announced firm coal linkages (pacts between power producers and CIL committing supply) for all projects commissioned or to be commissioned in the future, without spelling out the details.
Despite this assurance, the coal problem seems far from over. CIL might have managed to increase output, but its production has been falling short of the target consistently for months. The 141 MT produced in the April-June period was short of the target of 149 MT by over 5 per cent. The shortfall translates into a loss of generation of over 2,000 Mw power annually. Besides, the shortfall in domestic output has meant increased coal imports. Despite domestic production of 565 MT, India imported 171 MT coal in the last financial year - an 18 per cent jump over the previous year's 145 MT. The problem was compounded by a depreciating rupee, even though global thermal coal prices remained subdued at $80-85 per tonne. The value of coal imports by India has jumped from Rs 39,000 crore in 2009-10 to Rs 86,000 crore in 2012-13. Last fiscal, the imports were close to Rs 100,000 crore.
The Union environment ministry is taking steps to relax green clearance norms to create an investor-friendly environment. The ministry recently issued guidelines exempting coal companies from seeking public hearing for expanding their production limits within minefields. "Coal companies having production capacity of more than 16 million tonnes per annum (MTPA) can expand production one time up to 5 MTPA (if transportation of additional coal produced is by means of conveyor or rail transport) without public hearing," an office memorandum issued last month stated. The Union power, coal and renewable energy ministry had approached the environment ministry in May requesting that the norms be similarly eased for expansion of coal production between 8 MTPA and 16 MTPA. The Centre, on the request of the coal ministry, had in June also decided to consider group clearances for adjacent mines of CIL rather than considering individual project proposals. The ministry has identified 94 such clusters in various CIL units.
A consolidation in the power space was long overdue, say experts. "Asset valuations had hit rock bottom before the change of government in May because many companies, which had picked up projects and debt during the boom of 2010-2012, had been facing financial problems, "says Dipesh Dipu, associate professor (energy) at the Administrative Staff College of India. He adds that the new government's promise of reforming the sector has helped increase valuations, but only those projects will find buyers which have attained a certain degree of assured fuel availability or development. "However, a more complete revival of investor interest will require concrete steps like the denationalisation of coal mining, restructuring of CIL and inviting the private sector to increase the efficiency of operation," he says.