JP Associates' plan to lower debt faces hurdles

Excess Kharcham capacity, fuel supply shortfall at cement and power businesses a big overhang

In a short span of three months, two potential buyers have walked away without purchasing the hydro power assets of Jaiprakash Power Ventures. With Reliance Power cancelling the Rs 12,300-crore deal, Jaiprakash Associates' (JPA's) plan to reduce debt might be at risk. Though the JP group has maintained that the deal was called off because of commercial reasons and not regulatory uncertainties, RPower has cited regulatory and tariff issues as the reason.

According to analysts, the company had clearance for 1,000 Mw (250 Mw x4) for the Kharcham Wangtoo project but exceeded this limit and the unauthorised increase in capacity can put a question mark on the entire project. Edelweiss Securities believes the deal cancellation is a significant negative for JPA, given its high debt of Rs 70,400 crore as at the end of FY14. Kharcham Wangtoo is the biggest asset, contributing Rs 300-400 crore to the bottom line.

There is a perception that the deal with RPower was called off because there was an issue with the Vishnuprayag asset, which remained shut for most of FY14. Although now operational, buyers could have had issues with the valuation of the asset. Now, JP Group has put two hydro projects and one coal project on the block - Baspa, Kharcham and Bina. The se are expected to earn a profit of Rs 600 crore collectively.

If the total deal value is Rs 12,500 crore, analysts believe it is the best JPA can get, as Bina has a 500-Mw plant with a power purchase agreement in place for 350 Mw and the balance remaining open. There is a coal linkage for 350 Mw, for which the PPAs are in place.

Rahul Modi of Antique Stock Broking feels the deal at current valuation is positive for JSW as it does not appear to be expensive and will add good quality assets to its portfolio. However, there is no clarity on how much the JP Group will get, as there is a project debt of Rs 6,500 crore and another Rs 1,600 crore of securitised debt. Analysts are not sure how this will be treated while valuing the assets. The cash on the books and FY15 cash flows will add to Rs 3,400 crore.

At a time when Jaiprakash Associates is staring at losing its captive coal mines after a Supreme Court ruling, the deal cancellation adds to the uncertainty. The group currently has a non-binding agreement with JSW for the power assets. Goldman Sachs expects the viability and profitability of JPA's cement and power business to be impacted by the ruling. The brokerage does not rule out the possibility of losing fuel supply for its power plant. In case this happens (Goldman Sachs assigns a 25 per cent probability to this), the existing investments might be eroded.