Merchant power becomes attractive, as business evolves into end-to-end model.
Adani Power, which raised Rs 3,000 crore through an intial public offer, had a rather subdued listing last Thursday. But even at the IPO offer price of Rs 100 per share, the company is valued at Rs 22,000 crore.
The company is planning to set up 9,900 Mw of capacity by 2012 and 20,000 Mw by 2020, and has 6,500 Mw of projects under implementation.
Adani Power may not be alone in getting this kind of valuation. Investment bankers said the next level of growth and value creation for many of the top groups in the country could come from the power sector.
India Inc’s big boys know this, the reason why they have lined up big plans in power. While the Vedanta group is planning power projects of 15,000 Mw capacity, the Anil Ambani group is proposing 28,000 Mw, Tata Power 10,000 Mw, the JSW Group 11,000 Mw and Essar 6,000 Mw.
Investment bankers said in the next five to seven years, four or five of them would emerge as key players, and create huge value, which could be around Rs 50,000 crore each – something GMR Group’s CFO, A Subba Rao, feels is entirely possible.
What has changed for big groups to make a beeline for power? ‘’People see an opportunity in merchant power, which can help a power project generate returns of up to 22-23 per cent against 16 per cent earlier,’’ Rao said.
Industry experts say that one-and-half decades of liberalisation is finally bearing fruit and the power business has evolved as an end-to-end business model. ‘’Earlier, the business was driven by PPA (Power Purchase Agreement). Today, you need not be bound by the PPAs; financing is becoming easy. The market is giving you a valuation of Rs 3,500 crore for 1 Gigawatt or 1000 Mw of power,’’ explained Rao.
No wonder companies are rushing with their power IPOs. After Adani Power and NHPC raised Rs 3,000 crore and Rs 6,000 crore through IPOs, some others also want to cash in on the investor sentiment. JSW Energy, promoted by Mumbai-based JSW Steel, plans to raise Rs 3,000 crore through an IPO.
Companies said governance levels have improved and distribution losses have come down — in Delhi, distribution losses have come down from 60 per cent to 20 per cent. As a result, the financials of state electricity boards have also improved.
What has changed is the return structure that awards efficiency. In the old regime, the return on equity (ROE) was capped at 14 per cent; it was a two-part tariff (fixed charges and variable charges), where fuel was a pass-through. Now, it is a single tariff bid.
‘’If you have a pit-head coal mine, you can produce thermal power at Rs 1.10-1.20 a unit, and sell it at an average tariff of Rs 2.00 a unit; you can make a margin of 70-80 paise a unit,’’ said an investment banker. Take Reliance Power’s Sasan project. While the 3,960-Mw project will offer power at Rs 1.20 a unit, analysts said the company’s real plan is to add 2,000 Mw merchant power capacity, on which it can fetch a price of Rs 3.50 a unit. Thus, it hopes to fetch an average price of around Rs 2 a unit (the average of two prices, Rs 3.50 & Rs 1.20, on 6,000 Mw.
This is possible, as there’s no restriction on coal usage from the mines allocated for the project. Typically, to produce 1,000 Mw of power, a thermal power plant needs five million tonnes of coal a year. To produce 6,000 MW, Reliance Power would need 30 mt of coal, and for 30 years, it would need 900 mt. The coal mine allocated for the Sasan project has reserves of a billion tonnes.
JSW Group MD Seshagiri Rao felt power is a good bet for the group. ‘’There’s less volatility, as it is a domestic-driven business. There’s good demand, as there’s a big deficit.’’ JSW Steel has 3,650 Mw of projects under implementation and another 7,700 Mw worth of projects under development. ‘’As long as we can balance the PPA and merchant power, it can be a good business,’’ said Rao.
He should know. The group’s flagship, JSW Steel, is the largest private sector steel-maker in the country, with a capacity of eight million tonnes, has overseas operations and yet, the company has a market cap of only Rs 13,000 crore.
‘’Power companies are getting valued at 9-15 times their Ebitda (earnings before interest, taxes, depreciation and amortisation). I don’t see such valuation for the steel business,’’ said the research head of a broking house.
But there are huge risks in merchant power. The country faces a power shortage in four months in a year (a couple of months in summer and winter), though there could be a lot of latent demand. Everyone is following a similar strategy on merchant power, availability of which will increase sharply (from an estimated 2,000 Mw to 7,500 Mw) in four years, when many of these projects get commissioned.
‘’Doing 300 Mw of merchant power versus 2,000 Mw is a different ballgame,’’ said an analyst. Once the demand-supply situation improves, the spot prices will start coming down, though they will always be higher than the contracted price. Yet, companies feel the next three-four years will provide significant upsides for merchant power.
“Government policy on merchant power could also be a risk if it decides to regulate merchant power tariff. Coal India may ask a higher price for coal meant for merchant power,’’ Rao said. He, however, felt the payment risks have substantially got mitigated, and would get addressed as open access kicks in.
Experts said if the government framed appropriate guidelines for acquisition of land and coal blocks and de-nationalises coal, things can change dramatically for the power sector. Only, the economy has to keep growing and investments in transmission and distribution keep pace with the increase in generating capacity.
“NTPC is the only global-size power utility in the country. It’s an established business model. Globally, utilities make a lot of money. Few Indian groups will create significant value from the power business,” said GMR’s Subba Rao.
RPower has around 7,000 Mw under execution and hopes to put up another 28,000-plus Mw of capacity in the next decade. Tata Power has a current capacity of about 2,800 Mw and 10,000 Mw in the pipeline. The giant NTPC has a current capacity of 28,000 Mw and plans another 22,000 Mw by 2011-12.
