In recent times, many heavy weight players such as NTPC, BHEL, Lanco, GMR Energy, BGR Energy among others have already started exploring options to get out of risky projects. Power players, grappling with issues such as fuel supply, land acquisition and cash crunch, are seeking possible avenues to rebalance their portfolios so as to ensure growth. Is consolidation on the anvil for the much addled sector? Pradeep Pandey explores.
Has the time come for the power industry to redesign their strategy to ensure growth and profitability remain in tandem? Recent trends indicate that India's power sector is headed towards a paradigm shift that will leave merely a few key players within the next few years. If energy sector specialists are to be believed then the industry is already headed towards consolidation as fuel and finance problems have squeezed small developers in the industry that once attracted an assortment of new players from diverse fields such as construction, IT, healthcare, fabrics and publishing.
In recent times, many big players such as NTPC, BHEL, Lanco, GMR Energy, BGR Energy among other have already started exploring options to get out of risky projects. In other words most of the industry players are seeking options to rebalance their portfolio. Meanwhile, many small companies, that ventured into the power sector when the markets were booming, are now focusing on their core businesses as economic growth has slowed down and banks are reluctant to finance their projects at a time when fuel supply has become a serious issue and also a costly endeavour to a great degree while being imported. However, most sellers are demanding a premium for land acquisition and state-level clearances for projects are still being developed but large companies are being choosy, waiting for the best deals. Nevertheless, there are very few among domestic players, who have the ability to buy projects in such a challenging scenario.
An M&A advisor with a global consultancy firm said that in states like Chattisgarh and Orissa have signed initial agreements towards adding up power generation capacity of over 100,000 MW, of which more than half were unlikely to translate into projects. For the entire country, MoUs may add up to an estimated 4-5 lakh MW of capacity. Given the reason now they many of them are willing to sell those projects that might help them to balance their portfolio and also facilitate liquidity inflow. 'Earlier, many projects were taken without due diligence and an assessment of the viability of a given project. How this has proved to an expensive mistake. So they have few options to consider,' said, R S Sharma, MD, Jindal Power. Sharma was also the Chairman of NTPC, before joining Jindal Power. He also added that issues like fuel supply and land allocation has hit many projects and companies as well. However, big companies who have committed to proper due diligence and have planned well before bidding for these projects do not have much of a problem with the timely executions or raising funds, added Sharma.
Moreover, many companies are willing to get rid of risky projects and aiming for consolidation but who shall actually acquire success in this regard remains to be seen since there are merely a few who have strength for acquisition in such a difficult economic scenario. Nevertheless, while the industry is heading towards consolidation but there are few domestic and global players who are keeping a close scrutiny on such deals.
'We foresee some consolidation in the power generation and highway concession space over the next couple of years. In general, there is a very limited interest from private equity investors and of course the capital markets in the infrastructure space. We find sector players looking to undertake asset sales or induct overseas strategic partners into their projects as a means to raise capital and meet project funding commitments,' said Rajesh Samson, Partner at Ernst & Young.
'We do find that in the highways, power generation, transmission and renewable power space, a number of global players are monitoring the situation in India with a view to undertake strategic partnerships and M&A in the near-to-mid term,, Samson added.
Rising M&A Prospects Big companies such as Tata Power, GMR Energy, Larsen & Toubro, CLP Power India, Torrent Power, KVK Energy, Jindal Power, Essar Power, Adani Power, Lanco Infratech, and GVK Industries were scouting for power projects with coal blocks and land bank, according to a survey conducted by Power Finance Corporation's equity advisory subsidiary.
There are many project acquisition opportunities available in India right now. There are companies, which have bagged clearances but want to exit their projects due to several reasons.
"Creating a power asset is not easy. The fact is that not everybody has the requisite funds to purchase assets since most of them are leveraged by a great degree. Interestingly, many non-core power developers are selling their assets and trying to reduce investments. We expect consolidation by 2016. A few foreign players are also interested time will tell who will be the consolidator," said Rahool Pai Panandikar, President, BCG India, a global consultancy firm.
The chief executive of a leading power company stated that the current environment would allow only big players to survive. "Fuel has become the most challenging issue and companies that are able to obtain fuel and are able to sustain themselves in this challenging period will undoubtedly survive," he said.
Experts say that even private equity firms are shying away from investment in power projects. Meanwhile, reportedly, few companies such as GMR Energy, Lanco and BGR Energy have offered their projects for sale. However, there have been no major acquisitions or financial closure announcements in the past six months. The equity investment scenario was not as deplorable as it is today, a few years ago . For example, in 2010, US-based private equity fund Blackstone picked up minority stake in Moser Baer Projects for Rs 1,350 crore. A few deals happened in 2009 with GMR Energy acquiring EMCO Energy and CESC Ltd picking up 51 per cent stake in Manikchand group's Dhariwal Infrastructure Ltd.
Most recently, financial daily HT Mint reported that a venture of Larsen and Toubro Ltd (L&T) and Mitsubishi Heavy Industries Ltd (MHI) is evaluating the acquisition of units set up jointly by BGR Energy Systems Ltd and Hitachi Power Europe GmbH, in what could be the harbinger of consolidation in the Indian power generation equipment manufacturing sector. However, both the companies did not provide any confirmations with regard to these reports.
The BGR-Hitachi joint ventures (JVs)'one makes turbines and the other boilers'have orders valued at around Rs 3,000 crore. BGR Turbines Co Pvt Ltd is 74 per cent owned by BGR Energy Systems Ltd and 26 per cent by Hitachi, Japan, while BGR Boilers Pvt Ltd is 70 per cent owned by BGR Energy Systems Ltd and 30 per cent by Hitachi Power Europe, Germany. The units have a manufacturing capacity of 3,000 megawatts (MW) each.
Apart from state-owned Bharat Heavy Electricals Ltd (Bhel), the Indian power generation equipment manufacturing space comprises ventures such as those between L&T and MHI, Japanese company Toshiba Corp and the JSW Group, Ansaldo Caldaie SpA of Italy and Gammon India, French major Alstom SA and Bharat Forge Ltd, BGR Energy Systems and Hitachi, and Thermax Ltd and Babcock and Wilcox Co. These companies forged ties in 2009-10, realizing that the demand for heavy equipment will increase drastically with huge plans for adding generation capacity in the country. While, state owned BHEL was over burdened with orders at that time. Interestingly, most of them have already set up manufacturing capacity.
Taking The Lead Though the news for possible sales and acquisitions are running around, there are only a few that materialised. For example, the country's largest power generator NTPC Ltd has decided to merge its subsidiary NTPC Hydro Ltd (NHL) with itself as part of a restructuring exercise. It is also in the process of finalising the probable exit from non-performing joint ventures.
Under its restructuring exercise, NTPC has already decided to exit International Coal Ventures Pvt Ltd (ICVL) and the National Power Exchange. Further, the utility is mulling an exit fromother JVs such as NTPC-Alstom Power Services Pvt Ltd, BF-NTPC Energy Systems Ltd (BFNESL- in which Bharat Forge Ltd holds a 51 per cent stake) and NTPC-Telk, a tie-up with Transformers and Electricals Kerala Ltd. Global consultant Deloitte Touche Tohmatsu India had recommended timed exit by NTPC from these JVs.
While NHL was set up to develop small- and medium-sized hydropower projects, NTPC-Alstom, was set up for renovation and modernization of power plants. BFNESL-JV was set up to make castings, forgings, fittings, high-pressure piping and other plant equipment. NTPC-Telk was to set up for the manufacture and repair of transformers.
The state run utility has 19 JVs and five subsidiaries in areas such as electricity distribution, services, energy efficiency, equipment manufacturing, power trading, power exchange and coal mining. NTPC has also formed a JV with the Asian Development Bank and Kyuden International Corp. to develop clean-energy projects. NTPC has a power generation capacity of more than 41,000 MW and plans to add more than 14,000 MW during the 12th Plan period (2012-17).
Following the track, state run heavy engineering major Bharat Heavy Electricals (BHEL) has taken a strategic decision to exit some of its JVs and also remain cautious in forging fresh JVs in near future.
The decision came after the company witnessed a decline in its cash balance. BHEL has already exited the 1,600 MW Udangudi power plant, a JV with the Tamil Nadu Electricity Board. It has also three other JVs with state utilities such as Maharashtra, Madhya Pradesh and Karnataka for putting up additional capacities. Most of them are hanging due to various issues such as fuel linkages, land and finances.
BHEL currently has a cash balance of around Rs 6,000 crore, which shrunk from around 10,000 crore a few years ago. The state run firm now needs extra cash for productive investments in other areas like solar and nuclear power, besides meeting operational needs. The order book position has been weak for the last two years and even many orders have been cancelled due to delay in project execution by the power generators.
Gauging Opportunities If there are companies who are looking to stabilize themselves, there are companies who are also seeking opportunities to make ægood deals'. There are companies, which are looking opportunities not in domestic market but also in the overseas markets. For example, Tata Power through its subsidiary Tata Power International has signed an agreement with Clean Energy Invest AS (Clean Energy) and IFC InfraVentures. They together will develop hydro projects worth $700 Mn in Georgia. The hydro projects will have an aggregate capacity of 400 MW and shall be developed in three phases and the first phase of 185 MW is expected to be completed by mid 2016.
Tata Power and Clean Energy would hold 40 per cent stake each in the joint venture company. The power generated by these projects is planned to be vended primarily to Turkey which is a fast evolving energy market in Europe and with this partnership Tata wants to take advantage of the considerable potential that this market encompasses.
Tata Power commissioned India's first power plant- the hydro-electric station- in Khopoli (72 MW) and subsequently in Bhivpuri (78 MW) and Bhira (300 MW). Tata Power, along with Norway's SN Power, has a partnership to develop hydropower projects and is currently developing 600-MW Tamakoshi-3 in Nepal and has bagged the Dugar Hydro Electric Project in the Chenab valley in Himachal Pradesh. It is also implementing the 114-MW Dagachhu Hydro Project with Bhutan's Druk Green Power Company.
In hydro power segment, another player JSW Energy is also looking for the acquisition of power plants, while CESC Ltd has acquired two hydro electric power projects from Indiabulls Group for an undisclosed amount. Mostly, these companies have diverted their interest as they are unable to expand its power generation capacity due to lack of coal availability.
The distinction does not belong to sector heavyweights such as Tata Power, Reliance Power, NTPC or Suzlon Energy, some of the little know companies are also breaking feasible deals.
Greenko, which has bought about 30 small hydel projects with a combined capacity over 750 MW, is keenly waiting for acquiring more.
According to AV Kameswara Rao, Executive Director of Pricewaterhouse Coopers, a global consultancy, there are companies that have good project-management capability and they have potential to acquire projects incrementally.
Conclusion The above development indicates that the power sector is indeed headed towards consolidation and the industry experts reckon that in next two years only serious players shall hold ground. Why is this happening? Rao says 'We need to look at two different aspects. One, companies are looking for offloading their liabilities and in global context consolidation is happening. Secondly, it is a reflection of a shift in the thinking process.' The companies are redesigning their strategies for growth, which is the most important factor at any time. Earlier, companies were relating growth with scaling up volumes and now growth has to be connected with profitability. For this rebalancing of portfolio becomes must, he added.
Manufacturing capacity of BHEL & other JVs
Possible exit by BHEL
I wish to start pvc / pp electric wire unit in Delhi. What kind of information I can get if I subscribe for your magazine
Pls invite me all auction in gujarat
we are doing business developing for solar power ,thermal power , customer supporting and we have 45 mw splar power on hand needs investors.....
pls call +910842559230