RPower cuts its losses as it focuses on growth

The company moves to smaller projects with lower capital expenditure and to new destinations like Bangladesh

Almost a year before Reliance Power bagged the Tilaiya ultra mega power project (UMPP) in the Hazaribagh district of Jharkhand in 2009, Reliance Infrastructure, a Reliance Anil Dhirubhai Ambani Group, or Reliance ADAG, company, was awarded the Delhi Airport Metro Expressline project. Reliance Infrastructure bagged the second phase of the Mumbai Metro, too, in 2009. That was a phase when the Anil Ambani-led group was on a spree to acquire large infrastructure projects even if they came at highly aggressive quotes. The group, however, decided to exit all the three projects. Admittedly though, there aren't too many similarities in the three: the power plant and Mumbai Metro Phase 2 have not taken off at all, while the Delhi Expressline was up and running when the group transferred its operations to the Delhi Metro Rail Corporation.

These exits from mega projects have put the spotlight on Reliance ADAG and raised questions about whether abandoning them bode well for a group that once aspired to be a big player in the power and infrastructure sectors. Surprisingly, on April 28, the day the termination of the power purchase agreement for Tilaiya power plant was announced, Reliance Power stocks jumped 4 per cent to close at Rs 58.25 on the Bombay Stock Exchange. Though a detailed questionnaire sent to the group remained answered, it was obvious that investor sentiment was in favour of exiting the project since it had become a drag on the company.

Within weeks of announcing the exit from Tilaiya, RPower sprung a surprise by announcing its plans to invest in Bangladesh. Along with Bangladesh Power Development Board, it plans to develop a 3,000-Mw gas-based power project with a floating storage and re-gasification unit. According to the memorandum of understanding, the land would be provided by Bangladesh Power, while the regasification unit would be set up in Maheshkhali Island in the Cox's Bazar district of Bangladesh. Though the project with a potential investment of $3 billion is purportedly the largest foreign investment in Bangladesh, it still remains to be seen how it fares for RPower as Bangladesh too has a reputation of being a difficult investment destination as India. 

Back home, the Jharkhand government has asked the company to rethink its decision, though Reliance ADAG is unlikely to agree. As a senior executive in Power Finance Corporation points out, when the UMPPs were contracted out, the cost of each project was estimated at Rs 20,000 crore. The Tilaiya project has far exceeded the figure without an associated increase in tariff.

The termination of the 25-year power purchase agreement with 18 power off-takers in 10 states for the project was overtly due to the incessant delays in land acquisition. Reliance ADAG said it held more than 25 review meetings and extensive and continuous follow-ups with the Jharkhand government in the last five-and-a-half years. Despite these, based on the present estimates of the land handover process, the project could not have been completed before 2023-24.

Saving on investment
RPower says the termination of the PPA reduced the company's future capital expenditure by Rs 36,000 crore, with the first phase of capex investments of nearly Rs 50,000 crore completed. This, the company says, has been used in six operating power plants with a capacity of nearly 6,000 Mw. Investment of over 70 per cent of the initial capex would have been needed had the company decided to pursue Tilaiya. "With a debt-equity ratio of 1.5:1, one of the lowest in the power sector, RPower remains a financially conservative company," said the company statement.

Evidently, the company is heaving a sigh of relief because the announcement came within days of its announcing the full commissioning of another UMPP at Sasan in Madhya Pradesh, set up at a cost of Rs 27,000 crore. There too, the company had filed petitions with the Central Electricity Regulatory Commission seeking "economic restitution" due to rupee depreciation, changes in law during the construction period and changes in law impacting the revenue and costs during the operation period. Its petition on forex changes - in which it claimed a Rs 2,800-crore increase in capital cost due to rupee devaluation of 6 per cent annually as against 0.74 per cent permitted by CERC in 2007 - was rejected by the appellate regulator. When RPower bid for the project in 2007, the exchange rate stood at Rs 40.27 to a dollar, but at the time the plant was commissioned, it was hovering at around Rs 60 to a dollar. Another petition on change of law is pending with the Appellate Tribunal for Electricity.

That the company needed to cut risks is underlined by RPower's stagnating financials. While its net profit for the quarter ended March 31, 2015 rose just 3 per cent to Rs 276 crore, on an annualised basis it was only a tad higher at Rs 1,028 crore for 2014-15 compared to Rs 1,027 crore a year earlier.

Projects in hand
After quitting Tilaiya, the company still has two UMPPs: Sasan, which is fully functional, and the imported coal-based Krishnapatnam project in Andhra Pradesh, which is yet to take off.

Analysts say aggressive bids that translated to very low margins for the three UMPPs and unrealistically high traffic projections for the Delhi Metro project were the key reasons why the projects ceased to be attractive to Reliance ADAG. Even the Rs 12,000-crore Mumbai Metro phase 2 project was in limbo for five years before Reliance Infrastructure and the Maharashtra government decided to "mutually" terminate the contract last year.

The focus of the group now seems to have moved to smaller projects with lower capex spendings. Though RPower says it has over 10,000 Mw of power capacity and 55 million tonne of coal production in the pipeline, it adds that it will focus on developing a portfolio of renewable and hydro power projects. It has already signed a memorandum of understanding with the Rajasthan government to develop 6,000 Mw of solar power capacity and is working on hydro power projects of nearly 5,000 Mw in Arunachal Pradesh and Himachal Pradesh.

What is clear now is that while RPower's assets are reasonably strong, its earning growth has banked on crucial tariff orders and a decision on use of excess coal from mines allotted to the Sasan UMPP. Unfortunately, the orders have not been favourable to it. As for coal, the government recently asked it to surrender the Chatrasal mine attached to the Sasan project. "RPower's strategy was to use the excess coal from the mines for the Chitrangi thermal power plant and expansion of Sasan," said Emkay Financials in its latest report on the company. "But the directive impairs the profitability of the Chitrangi plant and Sasan expansion and considering that no significant capex has been incurred on the plants, it is most likely that the projects will be abandoned." Despite these setbacks, analysts hope that with revenues from the full commissioning of the Rosa, Butibori and Sasan power projects flowing in now, the company could see major growth next year.