JPA's debt reduction plan comes under cloud

Excess capacity in Kharcham project and inadequate fuel supply to cement & power businesses a big overhang

Two potential buyers have walked away from buying the hydro power assets of Jaiprakash Power Ventures, in a short span of three months. With Reliance Power cancelling the Rs 12,300-crore deal, Jaiprakash Associates' plan to reduce debt may be at risk. Even though the JP Group has maintained that the deal was called off due to commercial aspects and not over regulatory uncertainties, RPower has cited regulatory uncertainties and tariff issues as a reason.

Analysts claim that the company had clearance for 1,000 MW (250 MW x 4) 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 FY14 end. The Kharcham Wangtoo project is the biggest asset and contributes Rs 300-400 crore to the bottom line.

There is a perception that the deal with RPower got called off because there was an issue with the Vishnuprayag asset, which remained shut for most of FY14. Though it is operational now, the 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 -- which are expected to earn Rs 600 crore of profit collectively. If the total deal value is Rs 12,500 crore, then analysts believe that it is the best JPA can get, as Bina has a 500 MW plant with 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 is of the opinion that 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 JP Group will get as there is a project debt of Rs 6,500 crore and another Rs 1,600 crore is 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 up to Rs 3,400 crore.

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