Acchhe Din for Reliance Power investors

Updated: Jul 29 2014, 07:00am hrs
Reliance PowerReliance Power reported a net profit of R1,026 crore for FY14. Reuters
Reliance Power will fund the purchase of the hydropower portfolio it proposes to buy from Jaiprakash Associates, the enterprise value for which is pegged at R12,000 crore, by acquiring R7,100 crore of debt, sources close the transaction said, declining to be identified, reports fe Bureau in Mumbai. RPower will fund the remaining R4,500 crore to be paid directly to Jaiprakash Power Ventures (JP Power) by raising fresh debt of R2,400 crore and the rest through internal accruals, persons with direct knowledge of the transaction said. RPowers gross debt at the end of March 2014 was R27,714 crore; the debt to equity ratio after the transaction could go up to 2.05 times from 1.55 times, JPMorgan analyst Sumit Kishore wrote on Monday. The company on Sunday announced it had signed a memorandum of understanding with Jaiprakash Associates to buy its subsidiary JP Powers portfolio of hydel assets. The acquisition comes six years after RPowers initial public offering that raised R11,500 crore and will give the R-Adag company a portfolio of sizeable revenue-generating assets.


The three projects, located in Himachal Pradesh and Uttarakhand, generate net profits of R500-600 crore while the outstanding debt obligation is estimated at R7,100 crore.

Reliance Power reported a net profit of R1,026 crore for FY14 and expects to record a similar number for FY15. Along with a cash and cash equivalents balance of R2,782 crore (as on March 31), the company expects to comfortably fund the equity aspect of the deal, the source said. If necessary, the company will bring in a financial investor for a minority share, the person added. According to Bloomberg, RPower had cash to the tune of around R2,782 crore as on March 31. It plans to utilise a portion of this to pay JP Power, along with raising some fresh equity from financial investors, the person quoted earlier said.

A fair consideration for the three hydro assets would be about R11,000 crore, assuming no other corporate debt is to be assumed, Kotak Institutional Equities wrote in a report.

Reliance Power has expertise in raising cheap debt, as witnessed in the loans raised for the Sasan project and the company will consider an extended maturity over a 20-year period, which will reduce the rate of interest.

Reliance Power expects to close the deal in six months, according to the source. Approximately 2,800 JP Power employees working on the project will be transferred to Reliance Power.

Kishore, quoting Reliance Power, said the employee expertise will be used for implementation of Reliance Powers pipeline of hydro projects, including 1.1 GW in Himachal Pradesh. Part of these employees shall subsequently be transferred to Reliance Infrastructure which houses the EPC arm of the ADAG group, he wrote.

The deal announcement came barely two days after JP Power reported the fallout of its $1.6-billion deal with the Abu Dhabi National Energy (TAQA)-led consortium as the latter called it off citing change in the business strategy and priorities of the group. The TAQA deal was for two of JP Powers hydropower assets.

Prima facie, we think the deal is a win-win for JP Power, Reliance Power and Reliance Infrastructure. The deal solves the near-term cash flow issue for JP Power, adds EPS and RoE accretive operating assets and improves EPC capabilities of Reliance ADAG group, Kishore said.

UBS analyst Pankaj Sharma, who tracks the power sector, said that if the deal goes through, it will be positive for Reliance Power as the assets are one of the best operational hydro assets in the country. Sharma added that the companys debt-equity ratio places it in a relatively comfortable position financially to enter into this deal.

RPowers investors have expressed concerns in the past over the fact that despite having spent a majority of the IPO money it had raised in 2008, only a fraction of the massive power generating capacity it planned had been commissioned. Out of the around 25,500 MW of power generation capacity planned, only 4,525 MW are operational at present.

To be sure, many of the challenges RPower faces are common to others in the power sector. Some of these include availability of natural gas; changed regulations in countries like Indonesia and Australia that have made imported coal more expensive; and policy inaction on the part of the erstwhile government due to allegations of corruption in allocation of natural resources.

Reliance Power is expected to conduct a due diligence of JP Powers hydropower assets but will also rely on the results of a similar exercise undertaken by TAQA, according to analysts.