Udupi Power to de-risk Adani's portfolio

Billionaire Gautam Adani has found his first assured-return power project in Lanco Infratech's 1,200 Mw plant under Udupi Power Corporation in Karnataka.

Adani Power, which has a capacity to produce 8,580 Mw, has been in the red for the past three financial years because of power purchase agreements that do not factor in changes in fuel costs. The company reported a Rs 307 crore loss in 2013-14.

Udupi Power has a 25-year agreement that assures it a return on equity of 15.5 per cent a year for the plant that was commissioned in 2010. Lanco Infratech spent Rs 6,000 crore building it against an approved Rs 5,600 crore. This took Lanco's equity investment in the project to Rs 2,000 crore. Hence, the return on equity has come down to 10.8 per cent.

Adani Power's Rs 6,000 crore purchase of the plant includes Rs 2,000 crore in cash apart from taking over Rs 4,000 crore debts.

Bankers familiar with the transaction said Adani Power was likely to get additional capital expenditure approved, reducing its equity exposure and providing the assured 15.5 per cent return on equity.

"We believe this transaction is neutral for Adani from a shareholder value perspective," said Bhargav Buddhadev, an analyst with brokerage firm Ambit Capital. "But this will de-risk Adani Power's existing portfolio with the acquisition of an asset that has an assured return on equity."

Adani Power had net debts of Rs 43,319 crore at the end of 2013-14 and its net-debt-to-equity ratio was 6.62. The Adani group, which includes Adani Enterprises and Adani Port apart from Adani Power, will raise Rs 10,000 crore as equity capital through qualified institutional placement in the next few months. A substantial portion of this is expected to be for the power company.

"Now is the time for consolidation in the Indian power sector, and Adani Power has taken a lead," said Gautam Adani, chairman of the Adani Group.

"This marks our entry in southern India and we are bullish on expanding our presence further in the country," he said. The company is targeting a capacity of 20,000 Mw by 2020.