Mumbai: Power companies, which have raised close to $6 billion (Rs28,080 crore) in less than two years, will need to find more money to keep their projects going next year while making sure they line up enough fuel and struggle for critical resources such as land and water.
The sector raised a substantial Rs11,862 crore through initial public offers (IPOs) and institutional placements this year, but analysts said that lenders, who provide the bulk of the money for power projects, will become more demanding next year.
“This will be the single biggest challenge for power companies next year and will separate the men from the boys,” said A.V. Kameswara Rao, executive director at audit and consulting firm PricewaterhouseCoopers.
Power projects have long gestation periods, typically taking three-five years before they begin generating electricity.
Initial investments run into several hundred crores of rupees, forcing companies to be constantly on the lookout for funds.
But lenders, said Rao, are turning more cautious as a number of inexperienced private companies have jumped into the power generation market over the past year.
“Earlier, you could just put up a retired person and get some clearances to kick-start a project,” Rao said. “But lenders are now keen to see well-structured project bids. They will demand better homework from the developers, failing which they will be hesitant to put in money.”
Chaula Desai, associate director at consulting firm Ernst and Young, said power projects usually have a 70:30 debt-equity ratio.
“Term lending institutions are constrained by prudential norms and are subject to sectoral and group exposure limits,” Desai said in an email. “With developers already taking large amounts of debt to fund their current projects, these norms may inhibit their ability to borrow in the long term.”
The reality check has been reflected in the markets, which have shed some of their early exuberance over the sector, with all the five companies that have listed since February 2008—Reliance Power Ltd, Adani Power Ltd, Indiabulls Power Ltd, National Hydroelectric Power Corp. Ltd (NHPC) and KSK Energy Ventures Ltd—below their list price as of the Thursday close.
Power companies have managed to raise in excess of Rs27,000 crore from the public since February 2008 through IPOs.
That cash won’t be enough to fund the projects in the pipeline, Desai said.
Companies would thus have to raise the balance through follow-on issues, he said, pointing out that state-run power generator NTPC Ltd. had already announced plans for a follow-on issue next year.
Three power companies raised money through IPOs this year, including the government-owned hydel company NHPC (Rs6,038.55 crore) and private sector firms Adani Power (Rs3,016.52 crore) and Indiabulls Power (Rs1,529.10 crore).
Earlier this month, Jindal Power Ltd announced plans to raise Rs10,000 crore through an IPO, likely to take place sometime in 2010.
But generating funds won’t be the only worry for the power sector companies next year.
Experts say companies would struggle to arrange for coal to power their plants— both at home and abroad.
At least 80% of India’s coal requirements are met by domestic mines, but delays in local mining clearances have forced the private sector to turn to foreign shores.
Just 14 of the 200 mines allocated for captive mining have started production because “securing environmental and forestry clearances is extremely complex and time-consuming,” said a July report from Crisil Infrastructure Advisory, an economic policy consultancy.
As a result, Indian companies are buying stakes in mines in Indonesia, South Africa, Mozambique and Australia to ensure continuous supply. But looking abroad makes the companies vulnerable to protectionist measures, such as a recent proposal before the Indonesian government to cap coal exports at 150 million tonnes a year.
Besides fuel, power companies will also have to grapple with increasing competition for land and water in coming years, said a report from Edelweiss Securities Ltd.
“Access to fuel, land and water are critical to complete projects on time... These three elements are available at nominal costs today,” Edelweiss said. “Our interactions with industry sources, however, highlighted that their requirement is likely to significantly increase” in the 12th Plan period, which starts in the 2012-13 fiscal.
“Sourcing them at reasonable prices could be a key hurdle. Any delay in execution may not only result in higher project costs, but could also risk penalty payments, since tariffs are predetermined, returns could be significantly hit,” it said.
Does this mean investor interest in the sector is going to decline next year? Not really, said Krishnamurthy Vijayan, chief executive of JPMorgan Asset Management. Vijayan is “continuously bullish” about power and said it will remain a sunrise sector.
“True, there are concerns of fuel, land and water resources. The sector also faces political challenges,” he said. “But we are still positive about the long-term direction of the sector.”