Essar Power Ltd, part of the debt-laden infrastructure conglomerate Essar Group, says it will make a net profit in fiscal 2017 after four years of losses and is looking at becoming a zero-debt company in the next three years.
In an interview, Essar Power managing director and chief executive officer Sushil Maroo said lower domestic and international coal prices, a revival in demand following the government’s power sector revival package and better plant utilization have helped the company improve its financial performance.
The claims come at a time when the Essar Group seeking to bring in investors in other group companies including Essar Steel India Ltd to bring down debt levels. In November last year, Essar Steel said that it will bring in a strategic partner into it steel division but a deal is yet to be struck. In July, the Essar Group agreed to sell 49% in Essar Oil Ltd to Russia’s OAO Rosneft. That deal is yet to be closed as well.
In the interim, Essar Power has seen its performance improve.
“Essar Power is on the verge of a major turnaround for the first time in last four years’ operations. The company has posted around Rs.600 crore of losses. The year 2015-16 would be profit after tax positive,” Maroo said.
Essar Power had consolidated debt of Rs.20,000 crore as of March 2016. Of this, Rs.3,500 crore is on the books of the holding company.
To begin with, Essar Power will repay this holding company debt over the next two years. Rs.1,500 crore has already been paid, said Maroo. Mint could not independently verify whether Essar Power had retired the debt.
“Everything went wrong in last three years. We have seen the worst. Three coal blocks got cancelled. Power production stopped for last three years,” Maroo explained while adding that things have improved in the last six months.
“Coal prices dropped. The fall in international and domestic coal prices helped to boost profitability of Salaya plant in Gujarat. It has used all types of coal. Now, we have the right kind of coal at lower prices,” Maroo said.
He added that the government’s Ujwal Discom Assurance Yojana (UDAY) initiative has provided opportunities for private sector power companies to sign PPAs (power purchase agreements) with the states that have joined the initiative.
Maroo said one of the units, Essar Power Gujarat Ltd, reported a profit after tax for the first time in fiscal 2016 due to cheaper coal procurement through the e-auction platform and international markets like South Africa, Colombia and Russia. Maroo said that this unit is current in all its payment to lenders. Another unit Essar Power MP Ltd, that could not be operated due to non-availability of coal and high prices, has also secured 6 lakh tonnes of coal through a special forward e-auction. Mahan Power plant operating under Essar Power MP had commenced operations at one unit in April 2016, while the second unit is expected to begin operations in September 2016.
Essar Power Jharkhand Ltd is expected to sign a power purchase agreement with Jharkhand by June, Maroo said, adding Essar Power Hazira Ltd has commissioned its first unit of 135 MW plant during the year.
“The company (Essar Power Hazira) is expected to be PAT positive in its first year of its operation. The estimated Ebitda (Earnings before interest, taxes, depreciation and amortization) is Rs.120 crore in FY15-16 with only one unit operation. Meanwhile, Essar Power Orissa Ltd’s first unit of the project is already operational and is currently running on full load. The second unit is on the verge of completion and we are targeting its COD (commercial operation date) by June 2016,” Maroo said.
Asked about its gas-fired Bhander Power Plant, Maroo said gas-based assets have not been in operation for some time now due to high gas prices. Maroo added the company has started negotiations with international firms to buy gas as prices have fallen.
Not everyone is convinced a turnaround will be easy.
“While the power sector has certainly benefitted from the government’s policy initiatives, individual companies are yet to see a real turnaround,” said Kameswara Rao, leader, energy, utilities and mining at PwC India.
“The challenges that private power producers face are multiple. For example, a sizeable capacity remains untied as discoms are reluctant to sign more PPAs due to lean demand, and an ample supply thanks to India adding 100 GW new capacity in the last five years,” said Rao, adding there are other concerns such as higher input costs and lower recoveries due to delayed payments. He added that individual states have only marginally revised tariff rates for some categories, which means discoms will continue to accumulate losses.
“In such an environment, it might be a stretch to expect any producer to achieve a radical turnaround,” said Rao.