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The big deal about Anil's recent deals

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Securing $16 billion in credit to fuel its ambitious power plans could not have come at a better time for Reliance Power.

Anil AmbaniShowmanship comes naturally to Anil Ambani. Even Steven Spielberg will vouch for that. So it was no surprise that he pulled it off — not once, but twice in less than a month — at the diplomatic high table.

Just ahead of Prime Minister Manmohan Singh’s meeting with Chinese counterpart in Hanoi, Ambani signed a mega equipment supply and financing deal with and then followed it up by signing yet another arrangement with and US Exim Bank.

A coup that not only assures him equipment from these high-profile vendors along with their maintenance, but also assures the flow of over $16 billion (Rs 72,000 crore) in funds from them for the highly ambitious nearly 40,000-Mw power plants that Ambani’s (R-Power) is planning to install over the next decade to emerge the country’s largest private sector power utilities player. Such a deal is unprecedented in India’s project finance history.

But what’s the big deal about the deals, especially when the bogey of cheap and faulty equipment exports from there keep cropping up time and again?

First, Shanghai Electric will supply 36 boiler turbine generators worth $10 billion to R-Power for its 30,000-Mw-and-growing thermal power portfolio over the next three years. That, according to analysts, itself will lead to a 20 per cent cost saving for R-Power. Riding that, Chinese banks have also agreed to provide a $12-billion credit line to finance those equipment supplies.

Likewise, GE will supply turbine equipment worth $750 million for R-Power’s 2,400-Mw gas-based plant at Samalkot, Andhra Pradesh. Here, the will provide R-Power $5-billion in financial support to buy US goods and services required to develop 8,000 Mw of gas-fired electricity and up to 900-Mw of renewable (read: solar and wind) power.

That’s not all, the US Exim Bank will also furnish an additional $970 million as export credit to one of R-Power’s special purpose vehicles, Sasan Power, to procure mining equipment and services from Bucyrus International of the US for the upcoming 3,960-Mw ultra-mega thermal plant.

“With the US and Chinese deals, we have de-risked all our projects in the pipeline and ensured 70 per cent of funding for project development," says R-Power CEO J P Chalasani. Securing this $16 billion in credit for equipment and other related investments to fuel its ambitious power plans couldn’t have come at a better time for R-Power.
 

SMART STRATEGY
* Shanghai Electric will supply 36 boiler turbine generators worth $10 billion to R-Power for its 30,000-Mw thermal power portfolio. Chinese banks will provide a $12-billion credit line for equipment and other supplies 
* GE will supply turbine equipment worth $750 million for R-Power's 2,400-Mw gas-based plant at Samalkot. The US Exim Bank will provide $5-billion in financial support to buy US goods and services  
* US Exim Bank will also furnish an additional $970 million as export credit to procure equipment and services from Bucyrus International of the US for Reliance Power’s upcoming 3,960-Mw ultra-mega  thermal plant

Most Indian banks and financial institutions were finding it difficult to lend to the Ambani’s Reliance-ADAG, as most of its firms were reaching group exposure caps. All of R-ADAG’s flagship businesses — from finance, telecom to power and infrastructure — are cash guzzlers with high debt requirements. Power alone is looking at Rs 1,12,500 crore ($25 billion) in just three years to build 25,000 Mw of power generation capacity.

R-Power has already raised over Rs 30,000 crore as project debt for 10,000 Mw from Indian lenders. Equity for these projects has been pumped in from the Rs 11,500-crore raised two years ago from a public offering. New foreign sources will therefore open a fresh funding avenue.

“A large chunk of the funding requirement has been taken care of. But what is more significant is that with Shanghai Electric, the engagement will be for the plants’ full lifecycle of 30 years at pre-fixed prices with pre-fixed escalation clauses. From spare parts to service contracts, plant synchronization to joint R&D for future products and even training of our manpower, we are looking at collaboration at all levels,” Chalasani says.

His argument is simple: Not only do the Chinese and US banks have enough confidence in R-Power’s execution capabilities to agree on such mega financing, they are in effect bankrolling each other via R-Power. “The American banks will be funding the mining equipment for Sasan, which will run on Chinese boilers and generators. If the US had apprehensions on Chinese equipment and the bogey against them or about us, they would not have funded the projects,” says Chalasani.

Similarly, Shanghai Electric will be under pressure from its own banks that are taking exposures in case the vendor delays equipment delivery or supplies faulty parts. “All its money will be locked in India for 15 years. So, they have done proper due-diligence and are confident enough to offer the long-term loans,” he adds.

Ambani started work on this project one-and-a-half years ago when he went to China and met the mayor of Shanghai and Shanghai Electric brass. Through intense brainstorming, both sides also agreed to explore a manufacturing JV in India to tap the growing capital goods requirement. A manufacturing base may offset any criticism of imports flooding the domestic market and show how strategic the Chinese view India’s markets.

Street unimpressed
The street is not rejoicing yet. The bigger worry is project execution, and the timelines are very steep. R-Power has bagged three ultra-mega power projects, and that alone is 12,000 Mw. And that is less than half its total portfolio. “We remain cautious, particularly from the low visibility of execution of the huge pipeline,” says Prakash Gaurav Goel, power analyst with ICICI Securities, in his latest report, maintaining his sell call on the stock.

The wariness comes from the fact that today only 1,033 Mw is operational, and the remaining projects are all at different stages of implementation. “A unified Reliance is used to delivering big projects, but times have changed. Debt is not a challenge for R-Power, as it is following prudent debt-equity guidelines. But there are several external risks like land and environment, which are beyond R-Power’s control,” explains a senior banker.

The management doesn’t buy the logic. “The development period (land acquisition, fuel, fund tie-ups and clearances) is the riskiest for power generation projects in India. If you have sufficient funds, the construction will not take much time," counters R-Power CEO J P Chalasani.

Timely completion can make or break power company earnings in more ways than one, believes Micheal Parker, senior analyst at Bernstein Research. Parker feels that with 310,000 Mw of capacity being built by 2016, the likelihood of over capacity is a possibility, even in India.

As more capacities are built, the higher merchant tariffs or spot prices will come down substantially, which, in turn, will substantially alter the revenue dynamics. In the last one year alone, merchant tariffs have more than halved, as state electricity boards have reduced buying.

Even though there are still concerns over the availability of gas as a raw material for its plants, the biggest advantages that R-Power enjoys are its 2-billion tonne captive coal reserves in India. Another 2 billion tonnes will be sourced from its Indonesian mines. “What sets R-Power apart from its peers is its coal reserves. Upstream is where they have value,” said a power sector analyst with a foreign brokerage. That gives the company a huge advantage to improve margins, even though the Street would like more clarity.

According to Jeff Evans of Macquarie Research: “For a company with no experience in coal mining, that needs to deliver around 35 million tonnes of coal into low IRR projects before capitalising from excess coal, with a resource controlled by the government, in regions with environmental and political risk, the risk remains relatively high.”

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