Hits trump misses in power firms' $4.4-billion acquisition spree

Acquisitions by Tata Power, Adani Power & JSW Energy were profitable in FY20

India’s top three private power producers — Tata Power, Adani Power and JSW Energy — combined acquired assets worth more than $4.4 billion in the past six years. While debt remains a concern for two of the three companies, they saw more hits than misses in this acquisition spree.

“They were technically the only three buyers with the capability to pick up the assets that were available in the power sector fire sale back then,” said an industry executive who did not wish to be identified. The executive said that some assets were sold at half the price of setting up a new plant.

Of the assets acquired, three of the big ones were Adani Power’s $1 billion acquisition of Lanco Infratech’s Udupi power plant, JSW Energy picking up two of Jaiprakash Power Ventures’ hydro assets at $1.56 billion, and Tata Power buying Welspun Energy’s renewable assets for $1.3 billion. All the assets were profitable in FY20, according to annual reports.

The acquisition spree, however, also added to the debt burden of these companies, which were already highly leveraged. Tata Power’s total debt in FY14 was Rs 40,173 crore, and it rose Rs 48,376 crore in FY20. Similarly, Adani Power’s debt rose from Rs 44,150 crore to Rs 55,123 crore in FY20. JSW Energy has been an outlier, with debt reducing to Rs 9,840 crore in FY20 from Rs 10,106 crore in FY14.

“I would not attribute the debt rise and debt problem of these companies to the acquisition spree. These are companies that are highly leveraged by nature,” said a power sector analyst, who did not wish to be identified.

In 2019, Tata Power through its joint venture Resurgent Power Ventures acquired a majority stake in Prayagraj Power Generation. 

That same year, Adani Power also acquired coal-fired Korba West and GMR Chhattisgarh Energy. Though, it is early to comment on the financial improvement of these entities, analysts remain confident of an eventual turnaround.

The acquisitions have worked well, said Venkataraman Renganathan, managing director for Alvarez & Marsal India. 

“The issue in most of these projects was the capital structure, high leverage and project costs. The sale allowed for a re-pricing and the change in ownership also opened opportunities for restructuring debt. This has helped make these assets financially viable.”
 

Companies like Tata Power and JSW Energy have also used these acquisitions to further their expansion strategy. 

“The Jaypee hydro acquisition was not cheap. However, those assets have brought a balance to JSW Energy’s coal portfolio in terms of a green source of energy,” said an analyst.

Tata Power’s Welspun’s renewable assets acquisition was seen as an expensive one. However, it helped the company build a bigger green portfolio overnight. “Tata Power bought the assets at a time when there was less stress in the system. The company may find the same size of assets at cheaper valuation now. It helped build the green portfolio,” the analyst said.

Two of these three companies have now decided to not invest in thermal projects anymore. “In 2020, Adani Power seems to be the only buyer for thermal assets. The group has managed to weave a strategy around using cash flows of a thermal asset to build a green portfolio,” the analyst said.

Renganathan said: “There would be a handful of sales, but not many. Covid also hit the liquidity position.”

JSW Energy said in August that it had called off talks to acquire GMR’s Kamalanga Energy because of Covid.

In addition, India’s muted power demand and its impact on merchant power sales might also hamper the quick turnaround of some recent acquisitions.

“One’s ability as an acquirer helps to mitigate risks like low coal supply, lack of funds etc, through a mix of working capital support, reduction in borrowing cost, support in PPA tie ups or selling power in the merchant market. With the deep haircut taken by lenders for these assets and better management of input costs, the acquirer can also sell power generated at a lower rate,” said Sudhir Kumar, associate director at CARE Ratings. “Most of these buyers bargain really hard, acquire very competitively, and then turnaround assets over a period of time. The larger question is their ability to sell given India’s subdued power demand with almost zero power deficit.”