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An exciting game of musical chairs seems to be on in India’s power sector. In the latest round, Gautam Adani’s Adani Power is the last one ‘sitting’ with the tag of ‘largest independent power producer (IPP) in the country’, with its installed generation capacity rising to 8,620 megawatts (mw) after a 660 mw unit was commissioned at Tiroda in Maharashtra. Adani’s capacity is expected to go over 10,000 mw soon, once the acquisition of the 1,200 mw Udupi plant is completed. A few months ago, the Tata Power held the top position, with an installed gross generation capacity of 8,613 mw. The Indian power sector, which has at least 30 private IPPs, is witnessing a race between the top players — Tata Power, Adani Power, Lanco Infratech, JSW Energy and Reliance Power — to be crowned as the country’s largest private power producer.In this quest, the players are going in for quick capacity additions despite around 39,000 mw of stranded or troubled capacity available for sale, thanks to a changing business environment. Two big-ticket deals involving Adani Power and JSW Energy (and a failed attempt by Reliance Power) have gone through in the last few weeks, and experts say there’s more in the pipeline. “As we speak, at least half a dozen big-ticket deals are being discussed to my knowledge and some of them may even go through,” says Sanjay Sethi, executive director, Infrastructure, Kotak Investment Banking.What explains the sudden rush for consolidation and what exactly has led to the hurried buyer-seller discussions in an industry that is in a shambles? More on that later, but what is clear is that the scramble comes amid uncertain coal supplies and the coal industry itself looking for a policy push to revive its fortunes. Even more intriguing is the fact that leading corporates such as ADAG (Reliance Power) and the Adani Group are bullish on adding capacity despite their stretched balance sheets and huge debts. But before we get to the answers, it will be interesting to look at the tug of war between the top private power producers, their big plans (before the Indonesian coal law change) and the current status. DIFFERENT STROKES: (From left) Anil Sardana, Sajjan Jindal and Anil Ambani. While Tata Power had a debt of Rs 30,469 crore as on March 2014, JSW Energy and Reliance Power were in better financial healthScramble For Capacity In April 2011, Hyderabad-based Lanco Infratech made an announcement that surprised the industry. Lanco, which had just 500 mw of operational capacity in 2008, had become the largest independent power producer in the country, with 3,292 mw, following the synchronisation of its 600 mw pithead Anpara project in Uttar Pradesh. An elated L. Madhusudan Rao, executive chairman, also announced that Lanco planned to add 4,000 mw in the short term, with an investment of over Rs 22,000 crore. “Our long-term goal is to reach 15,000 mw by 2015,” Rao said.This development was a big blow for Tata Power — the country’s first private sector power producer, dating back to 1911 — which had built up a capacity of over 3,000 mw by 2011 through consolidation. Unfortunately, for Tata Power, big capacity additions did not happen for seven to eight years since 2000, by when it had set up nearly 2,300 mw of capacity. While it did consider taking over the troubled 2,000 mw-plus Dabhol gas plant in Maharashtra in partnership with British Petroleum during the period, the deal did not materialise. Tata Power also signed up with the Orissa and Maharashtra governments for thermal projects in 2005-06, but they too did not take off. In 2009, Tata Power added a 250 mw unit at its Trombay Thermal Power Station in Chembur and a 120 mw gas-based unit in Jamshedpur. While competitors were aggressively looking to add capacity, its plans were more moderate — 318 mw in 2010, 1,138 mw in 2011, 1,600 mw in 2012 and 2,400 mw in 2013. Besides, two major projects were under construction — a 4,000 mw ultra mega power project (UMPP) at Mundra and a 1,050 mw thermal plant at Maithon in Jharkhand.Lanco’s stay at the top was, however, short-lived. Tata Power began commissioning units one by one at Mundra and crossed 3,600 mw by the end of 2011. Lanco could not add capacity as planned owing to the debt that had piled up at the group level. By January 2013, Tata Power was on song, reaching 7,699 mw with the commissioning of four 800 mw super-critical units of its Mundra UMPP. “Our target is to have 18,000 mw of generation capacity and 4,000 mw of distribution by 2022,” states an email response from Tata Power. Incidentally, the target was 22,000 mw by 2022.Around the time when Tata Power was scaling new heights, Adani Power was also setting tall targets. While it missed bagging any of the four UMPPs awarded until then, it began constructing a mega power plant next to Tata Power’s UMPP at Mundra, and at two locations in Maharashtra and Rajasthan. Adani Power’s goal is to have 20,000 mw of power generation capacity by 2020.“We are confident of achieving a target of generating 9,240 mw of electricity by March 2014,” said Gautam Adani, chairman of the Adani Group, in December 2013. Despite a debt of over Rs 22,000 crore and losses due to the Indonesian coal crisis that led to expensive coal imports from that country, the company stuck to its plans and aggressively added capacity. In fiscal 2014 alone, Adani Power added 2,640 mw, almost 15 per cent of the 17,000 mw added across the country that year. The commissioning of the fourth unit of its Tiroda plant in April made Adani Power the largest private thermal power producer in the country. According to sources, Adani Power is looking to add another 5,000 mw. “This is the right time for consolidation in India’s power sector,” said Adani recently.For Reliance Power, which bagged three 4,000 mw coal-based UMPPs and raised a record Rs 11,563 crore from its initial public offer (IPO) in February 2008, consolidation did not come easy. It set a target of 35,000 mw in capacity by 2017, but its plans did not materialise and no additions were made save for the Rosa , Butiburi and Samalkot units and the Sasan UMPP. The other UMPPs — Krishnapatanam, Tilaya and Chitrangi near Sasan — are still years away from taking off. Reliance Power’s current capacity is 5,185 mw, half of what Tata Power and Adani Power added in the past few years. But soon, 660 mw will be added to the Sasan UMPP’s capacity and 100 mw at a plant in Rajasthan. At the annual general meeting recently, ADAG charirman Anil Ambani told shareholders that the company was planning to invest Rs 50,000 crore on building the Tilaya UMPP, a 700 mw hydropower plant and on solar energy. break-page-breakJSW Energy is no pushoever in the race for capacity. On 25 September, the company signed a memorandum of understanding with Jaiprakash Power Ventures to buy three of its operating hydropower plants with an aggregate capacity of 1,891 mw for over Rs 12,000 crore — a day after Reliance Power backed out of the deal. The existing operational capacity of JSW Energy is around 3,140 mw and it has 8,630 mw under implementation. Once the Jaiprakash acquisition is complete, JSW Energy’s capacity will rise to 5,031 mw. And, unlike other power companies, JSW Energy is cash rich. So, analysts believe, it will be aggressive on acquisitions.Why The Rush?According to industry observers, the rush among private players to add capacity is a consequence of the positive sentiment in the market ever since the new government came to power. So much so that the Supreme Court order cancelling coal block allocations made since 1993 has done little to dampen enthusiasm. The government is considering a slew of measures, among which are ensuring availability of coal for all new plants and those to be commissioned before 2017, restructuring of coal mining rules with an emphasis on private-public partnership, new coal block auctions, automatic clearances for linkages, capacity expansion of new plants by 50 per cent and amendment of the Electricity Act to improve tariff policy and regulations. The industry is hopeful that changes in policies related to fuel pricing, operationalisation of gas-based projects, a comprehensive review of competitive bidding guidelines (CBG), refinancing of stressed power assets and new coal linkage norms will provide a fillip to the sector. Besides, international coal prices are cooling, making the running of several plants viable. Since peaking in January 2011, the price of thermal coal has fallen over 50 per cent, to about $60-70 per tonne, allowing Indian power producers to import coal. However, a strict licensing norm effective in Indonesia since 1 October 2014 has created some uncertainty in the sector. “Besides the favourable factors that are helping the sector revive, many assets are available for sale due to a cash crunch and it is the right time for developers with deep pockets to consolidate, since such brownfield assets may not be easily available in future,” says N.K. Jain, former vice-chairman, JSW Energy. The government is pushing NTPC to be more aggressive. The state-owned behemoth, which already has a generation capacity of more than 43,000 mw, has been directed to acquire additional capacity from the brownfield market. A government committee headed by former power minister Suresh Prabhu has urged the country’s largest power generator to complete acquisition of distressed power plants within six months. Speaking to BW a few months ago, Arup Roy Choudhury, chairman and managing director, NTPC, said his company was in the process of finalising plants for acquisition. The criteria: plants with good equipment and fuel linkages in place. “Looking at our balance sheet, we can invest around Rs 10,000 crore for acquiring assets in the market,” said Choudhury.“The current resurgence in the power sector is based on the assumption that coal availability will be better in the future and tariff revisions will help both developers and distribution companies, with developers being promised assured returns on their investments,” says Anand Agarwal, CEO and director of Vedanta group’s transmission- and telecom-focused company, Sterlite Technologies. He notes that India is investing only half of what is required in the transmission and distribution sector compared to capacity addition, leaving many projects stranded after completion.Sources say acquiring brownfield projects is more viable in the current scenario than setting up new projects, which take five to six years for completion. An integrated generation project (power plant with a coal mine) is governed by a minimum of 46 key legislations and requires 90 key approvals or clearances for commencement of construction. Besides, acquisition of land is a big issue as large tracts with proximity to clean water resources are going to become a rarity in the country.“About 79,784 mw of capacity, with an investment of Rs 3,13,710 crore are affected due to under-recovery of fixed/variable costs, unavailability or shortfall of gas, projects without power purchase agreements (PPA) and coal block issues,” says Ashok Khurana, director general, Association of Power Producers (APP). Of this, projects involving a capacity of around 39,000 mw are facing viability concerns due to factors beyond developers’ control, he adds. This includes gas-based projects (13,566 mw) and projects that are in trouble due to coal linkages (25,834 mw). Other projects (17,177 mw) lack PPAs, according to data compiled by APP.But this does not mean that these stressed power assets are available at throwaway prices.“All projects are viable, provided there is clarity on PPAs, fuel linkages and bidding norms,” says Khurana, who adds that the priority should be to salvage existing stranded capacities and not add to capacity. AHEAD OF THE GAME: Gautam Adani’s Adani Power has toppled Tata Power to become the largest independent power producer in the private secto“In the case of the two big domestic deals struck recently, both were operational assets and the buyers were aware of the assured returns and profits over the life of the plants. Both Adani and JSW may have overpaid for these assets, but that can be justified by the fact that operational costs of Jaiprakash assets will come down through financial re-engineering. As for Adani, it has the clearance to further expand the Udupi plant’s capacity by another 1,320 mw,” says a senior power sector analyst.The Debt OverhangThe balance sheets of both Tata Power and Adani Power are not as healthy as those of Reliance Power or even competitors like JSW Energy and Jindal Power.Tata Power had a debt of Rs 30,469.94 crore and a not-so-robust debt-to-equity ratio of 2.90 (including impairment provisioning), on a consolidated basis, as on 31 March 2014. “Tata Power is evaluating and will continue to evaluate opportunities to acquire projects in various stages of development across the country,” says Anil Sardana, CEO and managing director, in the company’s annual report for 2013-14. To de-risk operations and investments in India, Tata power is also trying to go global. It is planning a 1,200 mw project in Vietnam, a 120 mw hydro project in Zambia and an imported coal-fired power project in Myanmar.Companies with strong balance sheets like JSW Energy and Jindal Power are going to gain in the near future, say industry observers. JSW Energy had revenues of Rs 8,782 crore in 2013-14, with a net profit of Rs 903 crore, while its total current liabilities as of March 2014 were Rs 4,446 crore. “JSW Energy has a strong balance sheet with no capex plans, leading to high cash-flow generation, which is a rarity among IPPs,” notes Abhinav Sharma, an analyst with HDFC Securities.But for pure infrastructure players like Lanco Infratech, these are bad times. A year ago, Lanco had over 4,000 mw of operational assets, 4,636 mw under construction and 6,840 mw of capacity under development. But a debt of over Rs 36,000 crore at the group level and a subsequent corporate debt restructuring (CDR) forced the company to divest its assets. Lanco Infratech declined to participate in this story.Some companies such as GVK Power and Infrastructure are treading the path of caution. “We are now focusing on consolidation of existing projects rather than chasing new projects,” said G.V.K. Reddy, chairman, GVK Power and Infrastructure, at the company’s annual general meeting. GVK has a debt of Rs 22,800 crore and is planning to raise some Rs 1,000 crore through a qualified institutional placement to cut its liabilities. Apart from two operational power plants of 900 mw each, GVK has over 5,000 mw of capacity in various stages of construction and development.“Power companies with good corporate backing can raise money and manage attractive valuations despite their debt as once PPAs and fuel allocations are in place, power projects will ensure profits and good long-term return on investments,” notes Jain, adding, “But it is up to bankers to decide on the parameters under which they will extend further credit to companies with stretched balance sheets.”Whether or not funds are available, aggressive capacity expansion is back on the agenda of leading power producers. This may lead to a make-or-break situation for many companies, but only time will tell. jayakumar@businessworld.inTwitter:@pbjayakumar(This story was published in BW | Businessworld Issue Dated 03-11-2014)
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Three years ago, Hindustan Petroleum Corporation (HPCL) rolled out a short-term growth plan which has now begun to yield results. At number six in the BW Real 500 2012-13 rankings, HPCL’s total income increased from Rs 1,86,334 crore in FY12 to Rs 2,17,514 crore this year and, its profit after tax (PAT) was at Rs 500 crore, close to three times that of the previous year. This growth is significant considering consumption of petroleum products in India increased by only 5 per cent in 2012-13 and raw material costs for HPCL rose by Rs 6,239 crore over the previous year.“We decided to implement a short-term growth plan called Target Shikhar in 2010 with a focus on improving refining profitability, investments in new areas and operational efficiency. Its implementation has helped achieve growth over the past year,” says S. Roy Choudhury, chairman and managing director, HPCL. Analysts note that the move towards diesel price deregulation and increase in bulk diesel prices since January has helped oil marketing companies (OMC), including HPCL, improve their numbers in 2012-13. In the fourth quarter, HPCL’s earnings before interest, taxes, depreciation and amortisation (Ebitda) were Rs 860 crore as against analysts’ estimates of a loss of Rs 680 crore, due to inventory and exchange gains. They note that a gross refining margin (GRM) of $2 for FY13 was lower than the previous year ($3), driven by inventory loss in the first quarter of the year. “The company reported GRM of $3.7 per barrel in Q4 FY13, lower than our estimate of $4.6/barrel and the GRM for FY13 came at $2.1/barrel against our expectation of $2.6/barrel,” note Mayur Matani and Nishit Zota, analysts with ICICI Securities. HPCL, which aims to achieve 42 million metric tonnes (MMT) in marketing volume of total petroleum products by 2016-17, achieved sales of 30.32 MMT in 2012-13, 4.7 per cent higher than the previous year. HPCL now holds 20.19 per cent marketshare among public sector oil companies. The growth during the year was made possible by higher capacity utilisation at refineries and highest ever annual production of petroleum products like LPG, motor spirit (MS) and bitumen. Retail sales of petrol and diesel increased by 0.14 per cent during the year to help HPCL corner a 25.2 per cent marketshare. Its share in MS and high speed diesel also increased 0.14 per cent. As of 31 March 2013, HPCL’s domestic gas consumers stand at 395 lakh, an addition of 32.17 lakh during the year. To increase its rural penetration, HPCL commissioned 243 distributors under the Rajiv Gandhi Gramin LPG Vitaran Yojana, besides commissioning 54 regular distributors. HPCL’s focus on laying product pipelines to bring down transportation costs and its foray into wind energy have contributed to its performance.(This story was published in BW | Businessworld Issue Dated 04-11-2013)
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