Electrifying game: Private power producers turn up investment cycle

Private power companies, led by Tata Power and JSW Energy, have been deleveraging their balance sheets over the past few years after investing cautiously and refinancing their debt to bring down the interest cost.

Tata Power, for instance, has reduced its consolidated net debt by Rs 11,400 crore in the last three years to Rs 36,559 crore as on March 31, 2021. To achieve that the company monetised some of its non-core investment and raised fresh equity from the promoters through a preferential issue. The company had a debt-equity ratio in the range of 2.5 two years back.

“We made a conscious decision to clean up (balance sheet) and one of the options was to sell our investment in some other companies. We also got preference capital from Tata Sons, which showed that they were convinced about our capability. All this helped us in reducing our debt,” said Praveer Sinha, Tata Power chief executive officer and managing director.

The company completed a preferential issue of equity shares worth Rs 2,600 crore to its promoters in FY21 primarily for repaying debt in its coal-based Mundra ultra mega power plant as part of its strategy to make the plant self-sustainable. Besides, it sold stake in Tata Communications for Rs 2,150 crore, besides the ships it owned for Rs 1,600 crore, its South African wind farms for Rs 700 crore, defence business for Rs 600 crore, and other assets for Rs 1,450 crore.

With the largest installed generation capacity in the power sector, Adani Power did not monetise any of its assets and instead acquired a few. It, however, did this through the more attractive route of a debt resolution scheme since they were cheaper to acquire. One such asset was GMR Chhattisgarh Energy Ltd (GCEL), which owned and operated a 1,370-Mw supercritical power plant at Raikheda village, in Raipur district of Chhattisgarh. It acquired 52.38 per cent equity in GCEL from a consortium of lenders and the balance 47.62 per cent from the GMR group. The acquisition was concluded in FY20 at an enterprise value of Rs 3,530 crore.

Adani Power, however, halved its indebtedness to Rs 11,498.93 crore during 2019-20 though borrowing increased to Rs 55,198.77 crore as of March 31, 2020 against Rs 46,979.70 crore as on March 31, 2019. “The increase in borrowings was mainly attributable to additional debt of the recently acquired companies and the under-construction 1,600 MW Godda power project, in addition to higher working capital borrowings due to an enhanced level of operations,” the company said in its annual report for 2019-20.

The report said the company would undertake “capital management” and pursue receiving anticipated regulatory payments. “Together, these efforts will allow us to free up cash flows, reduce finance cost, and enhance shareholder value.” On a standalone basis, Adani Power’s debt to equity improved to 0.20 at the end of March 31, 2020, from 0.53 in March 31, 2019.

Among private power generators, it had the highest gross debt at Rs 49,640.3 as of March 31, 2021. Emailed questions sent to a company spokesperson did not get any response.

In its annual report, Adani Power further said with a secure revenue stream of nearly 18 years at hand, it aimed to tap into global pools of investment with a focus on long-term investment in infrastructure.

Its peer Tata Power, however, did not issue any foreign currency bond because it felt the fully hedged cost of such bonds would have been higher than domestic borrowing costs. Tata Power has decided to go in for non-convertible debentures (NCDs) amounting to Rs 5,500 crore in order to pay off some of the more expensive loans, Sinha had told Business Standard in a recent interview. For investment in its newly acquired distribution business in Odisha and in its transmission business, the company would rely on cash flows. “We have a very robust cash flow and based on that we will make investment in transmission or distribution or any new business. Money will all come from internal cash flows and a little amount of debt,” said Sinha.

For JSW Energy, deleveraging has neither meant monetising assets nor refinancing. “On one hand, we have a portfolio of operating assets that are generating a steady stream of annual cash flows and, on the other hand, there was a lack of suitable return-accredited growth projects for capex so there was a natural deleveraging, which kept happening. Debt was getting repaid every year. Ebitda (earnings before depreciation, interest, tax and amortisation) was steady at Rs 3,000-3,500 crore for three years,” Pritesh Vinay, chief financial officer, JSW Energy, told Business Standard.

The company’s net debt has almost halved from the peak level of Rs 13,375 crore in March 2017 to the last reported Rs 6,913 crore in December 2020.

Net debt is derived after adjusting a company’s cash balance against its gross debt.

Vinay said a power project, being a utility business, had a power purchase agreement (PPA) and a predictable cash flow, depending on the counter party. “Projects tend to be bankable and you start with a 3:1 debt-equity ratio. Depending on the PPA tenure, the comfortable debt coverage ratio is 5-5.5 times Ebitda for a financer. In that context, we were at 3.5 times the net debt to Ebitda and net debt to equity was 1.0 times as of March 2018. With the exception of state-owned utilities, if you compare us with any other independent power producer, we ranked better on the leverage matrix and had the strongest balance sheet,” he said.

According to Vinay, refinancing was not a great option because any fresh borrowing or refinancing would be revenue-neutral. Additional money would be needed to pay additional debt and gain  only through a lower interest outgo. “The deleveraging of the last two to three years has put us on a very sweet spot to start re-leveraging without worsening our overall balance sheet profile. We are mindful of this because one of the advantages of a strong balance sheet is a better credit rating and, therefore, a better financing cost,” he said.

JSW Energy will increase its installed power generation capacity by about 55 per cent to 10,000 Mw, riding only on renewable sources. This would require a debt of Rs 10,000-11,000 crore over the next five years.

Reliance Power, which is going in for fresh equity raising, had defaulted in repaying loans and interest amounting to around Rs 930 crore as of March 31, 2020. “The group has been pursuing proposed strategic transactions/sale of assets and overall financial restructuring, when executed, would make available the required liquidity for the continuing business and would also provide an extended maturity period for repayment of restructured balance debt,” the company said in its annual report for FY20.

A company spokesperson, however, did not reply to emailed queries.

All power-generating companies, both government-owned and private, are aggressively pursuing green energy. The exception is Reliance Power, which still needs to clean up its balance sheet and get lender trust back.