It’s never a good feeling selling the family silver, but what does one do when creditors are baying at the door? Jaiprakash Power Ventures Ltd’s sale of its Karcham Wangtoo and Baspa hydropower plants to JSW Energy Ltd was met with a thumbs up from investors, who drove the stock up 5%.
These two power plants were the cash cows of the company, generating most of its earnings. Some analysts estimate that the Baspa power plant had a return on equity of as much as 27%. With the sale of these two plants, Jaiprakash Power has only one hydro power asset remaining—the Vishnuprayag plant. Its thermal power plants are not yet fully operational.
Despite key operational assets being sold off, and at valuations which are lower than earlier anticipated—JP Power is going to receive only Rs.9,275 crore now, compared with the earlier Rs.9,700 crore—investors seem to be happy that the firm’s debt burden will come down. Jaiprakash Power had a consolidated debt of Rs.32,065.15 crore at the end of March. If the whole of this Rs.9,275 crore is used to retire debt, the company’s debt-equity ratio would improve from 4.68 times to 3.33 times.
While that is useful, the basic problem that remains for Jaiprakash Power will be that it will have presumablyRs.20,000 crore of debt still on its books and will need to figure out a way to service that debt. To put it simply, a cash flow squeeze can’t be ruled out.
That should temper some investor enthusiasm.
Secondly, investors also appear enthused by the fact that Jaiprakash and JSW have signed a binding agreement for the sale of the former’s 500 megawatts (MW) Bina plant. But the market figure of a Rs.3,500-crore deal valuation appears to be wild speculation.
That amounts to Rs.7 crore per MW, higher than the replacement cost of Rs.6-6.5 crore per MW. Why would anyone pay that much for a plant which has a power purchase agreement for only 70% of its capacity, and whose parent is clearly a distressed seller?
However, the sale of that plant would further help pare debt. Reduced leverage levels would perhaps enable the firm to raise more money and start afresh.
JSW, on the other hand, has clearly had the upper hand. The assets are earnings accretive. As Mint reported earlier, it is already talking to banks for restructuring the debt on the hydro power plants’ books under the 5/25 scheme. With a debt equity ratio of 1.22 times, it also has one of the more stress-free balance sheets among power generators. Sure, incremental acquisitions such as its bid to buy Monnet Power Ltd could stretch leverage levels and lead to equity dilution, while increased transmission capacity could pressure profits from sale of merchant power in south India. But they are some time away.
(This article was first published on Livemint.com)