Sucheta Dalal :Power sector attracts diverse pla<x>yers
Sucheta Dalal

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Power sector attracts diverse players  

May 12, 2010

Since 2009, the power sector has seen the entry of players from diverse sectors ranging from auto-makers to real-estate players. Experts say that expected high returns are the key driver for this growing interest. However, coal issues, lack of managerial expertise and merchant power tariffs are key risks to watch out for.


Among the recent major announcements of forays into the power sector were by Shree Cement Ltd, Emami Ltd, Sundaram Clayton Ltd, Madhucon Projects Ltd (MPL), Era Infra Engineering Ltd, SKIL Infrastructure, Adhunik Metaliks, Singareni Collieries Company Ltd and the latest is by the Hiranandani Group.


“One of the main reasons to get into the power sector is that some of these companies saw a major downturn in the segment they were operating, for example real estate. Infrastructure projects, though capital intensive, provide a steady cash flow after the construction phase,” said Chaula Desai, associate director, Ernst &Young. She has been advising a couple of companies in their power-venture plans.


Ms Desai also pointed out that power portfolios have helped in attracting more investor interest. “Some of the companies or groups that have had power in their portfolios and who have listed these entities have done pretty well. This has been the driving force,” she added.


Apart from the high returns of a minimum of 18% that they are looking at, such ventures also allow players from diverse sectors to sell their projects or licenses at higher valuations later.


Last year, transformer maker Emco Ltd sold its subsidiary, Emco Energy Ltd, to the GMR Group. Emco was in the process of developing a 600-MW power project.


“They can get a return of around 20% to 30% on the cost, which is a good one,” said Amit Srivastava, research analyst, Karvy Stock Broking Ltd.


“Even if they are selling it (the project) at a later stage, they are getting good attractive valuations if the project is ready. However, there could be huge gains if they consolidate and list a larger capacity (power company),” said Ms Desai.


Venturing into the power sector is a natural expansion plan for companies like Era Infra and SKIL Infrastructure, who belong to the infrastructure segment. It also makes sense in terms of backward or forward integration for companies like Singareni Collieries Company Ltd (SCCL) and Adhunik Metaliks who are in the mining business. However, the power sector is completely new terrain for auto, real estate and FMCG companies like Emami, Hiranandani Group and Sundaram Clayton.


What would be important from an investor’s perspective? “If we were to analyse this from an investor’s perspective, we may not go for the new players due to their lack of expertise. Issues like whether they would be able to execute the project or if they will eventually sell the license to another player are also factors to be taken into consideration. Coal supply is another risk involved. Coal imports may not solve the issue as India lacks the port capacity required to manage its coal requirements,” said Mr Srivastava.


“Building a team to execute these projects would be the key challenge. The other option is to outsource through turnkey projects,” said Ms Desai. However, in terms of turnkey projects, the margins are impacted by 15% to 20%, which makes a huge difference to the bottom-line.


Further, the periodic fall and rise in merchant power tariffs is also a concern these companies may face. A number of them plan to sell the power generated in the open market, including companies like Shree Cement and SCCL.


“Long-term fluctuation in the merchant power segment is a risk that these players will be facing. However, they are content with the fact that even if the tariffs were to fall, the returns would still be decent at 15% to 18%,” said Mr Srivastava. However, Ms Desai shares a positive outlook on the merchant power risk. “The merchant power market is here to stay. They are looking at margins of 30% to 35% (in certain cases), which is quite attractive for these companies,” said Ms Desai.  
Amritha Pillay

-- Sucheta Dalal