Mumbai: Larsen and Toubro Ltd (L&T), India’s largest construction and engineering company, is likely to sell its 1,400 megawatt (MW) thermal power plant worth Rs.9,600 crore in Punjab once it becomes fully operational, as part of a plan to divest assets not central to its main businesses, several people close the development said.
One analyst estimated that the sale may fetch L&T as much as 27% less than the amount invested on the project.
The second 700MW unit of the plant in Rajpur in Patiala district is expected to be commissioned within a month, they said, requesting anonymity.
The Rajpura plant is the only power project of L&T that’s being built by its wholly owned unit Nabha Power Ltd.
The first 700MW unit was commissioned on 8 December and the firm plans to complete the commissioning of the second by March. Nabha Power was initially started by the erstwhile Punjab State Electricity Board for the development of the Rajpura project in 2010.
“As per schedule, it (commissioning of the second unit) is in April, but we are trying to do it in March,” Shailendra Roy, whole-time director at L&T, was quoted as saying by the Press Trust of India at the inauguration of the first unit in December.
L&T is trying to speed up the project’s completion to hasten the divestment.
“The project cost has been high and it directly impacts the net worth of L&T,” said one of the people. “It makes sense for the company to sell the plant instead of waiting for the cash flows and deploy the proceeds for other ongoing and future projects.”
L&T needs a substantial amount of cash over the next three years for projects that are being executed by L&T Infrastructure Development Projects Ltd, he said.
L&T did not respond to emails sent on 24 February.
The estimated capital outlay for the Rajpura plant is Rs.9,600 crore.
“In case of thermal power plants, every megawatt should ideally fetch Rs.5 crore in the market,” said Samir Bahl, head of investment banking at Anand Rathi Financial Services Ltd, a brokerage. That would fetch L&T around Rs.7,000 crore for the 1,400MW plant, much lower than the investment on it.
L&T has been trying to boost its earnings per share (EPS), another person said, which is estimated to be around Rs.8.645 (stand-alone) for the first quarter of fiscal year 2015, according to Bloomberg. Stand-alone EPS for the firm stood at Rs.13.40 in the December quarter.
“The company had a plan of building a 3x700MW plant in Rajpura, but shelved the plan of coming up with the third unit to avoid hurdles pertaining to approvals and clearances,” the second person said. “It is the right time for L&T to come out of the project and it should be able to find good buyers as the supply of raw materials has already been put in place.”
The company is contracted to supply power to the Punjab government for the next 25 years. Coal supply has been secured through an agreement with South Eastern Coalfields Ltd, a subsidiary of Coal India Ltd.
Earlier this month, the Canada Pension Plan Investment Board received approval from India’s Foreign Investment Promotion Board (FIPB) to invest about Rs.2,000 crore in L&T Infrastructure Development Projects, which is executing several projects in infrastructure segments such as roads, metro rail, ports and power transmission lines.
“There are some international utilities, particularly from the European and South East and Far East Asian regions, that are actively examining potential acquisition and investment opportunities in the power generation space in India,” said Rajesh Samson, partner, transaction advisory services, infrastructure, industrial and consumer, at EY, the consultancy and audit firm formerly known as Ernst and Young.
Foreign investors by and large are more interested in acquiring projects that have already started commercial operations, Samson said, because they realize that development and construction risks in India for such projects were substantial.
India needs around 15,000-20,000MW of fresh capacity every year to sustain economic growth, EY said in a 18 December report. To achieve it, $230 billion in investments is needed in the power sector in the next five years.
JPMorgan Asset Management invested $150 million in the Bhaskar Group’s Diligent Power Pvt. Ltd (a 2,520MW power portfolio) in May last year. French energy company GDF Suez SA will acquire a 74% stake in a 1,000MW coal-fired power project owned by Meenakshi Energy and Infrastructure Holdings Pvt. Ltd in Andhra Pradesh.
In the past two years, Asian firms such as Korean Western Power Co. Ltd and Korea South-East Power Co. Ltd have also invested in the power sector. The former took a 40% stake in Pioneer Gas Power Ltd, which has a power generation capacity of 388MW, in March 2012 and the latter acquired a 600MW thermal-based power plant in February last year, the EY report said.
The move to sell the Rajpura thermal plant is in line with L&T’s strategy to shed non-core assets.
In the ports sector, L&T is close to selling its holding in Dhamra Port in Odisha. Adani Ports and Special Economic Zone Ltd (APSEZ), which is set to buy Dhamra Port Co. Ltd for Rs.5,000 crore, has been appointed as a management consultant to Dhamra Port, an equal joint venture between L&T and Tata Steel Ltd.
In December 2009, L&T sold its 17% stake in Bangalore International Airport Ltd to GVK Power and Infrastructure Ltd for Rs.686 crore. In August 2012, the company sold its entire stake in L&T Plastics Machinery Ltd, another wholly owned subsidiary, for an undisclosed sum to Japan-based Toshiba Machine Co. Ltd.
L&T shares gained 0.77% to Rs.1,096.55 on Wednesday on the BSE, while the benchmark Sensex gained 0.65% to 20,986.99 points and the BSE Capital Goods index gained 0.94% to 10,254.45 points.