Mumbai: The $29.2 billion (Rs1.4 trillion) Aditya Birla Group has decided to re-enter the power sector by purchasing an existing project, two people familiar with the development said.
A strategic team appointed by Aditya Birla Management Corp. Pvt. Ltd is working on the plan, one of these persons, who is part of the group’s strategy team, told Mint.
The move comes three years after it exited the power generation business when it sold two proposed 1,000MW projects and liquidated another one soon after it had completed first-stage work, including land acquisition and environmental clearances.
Strategic move: A file photo of Aditya Birla Group chairman Kumar Mangalam Birla. Abhijit Bhatlekar / Mint
Unlike earlier attempts to build power plants from scratch, the group will now acquire projects that already have land and environmental approvals, and just need to be built.
The second-stage entry will also enable the group to start producing power, the third and final stage in the generation process, more quickly.
“To begin with, we have plans to acquire a controlling stake from existing promoters that own a 1,000MW power plant with enough land, coal mines and environmental clearance, preferably in Chhattisgarh,” the second person with knowledge of the move had told Mint earlier this week.
A spokesperson for the Aditya Birla Group did not respond to queries on the group’s plans to re-enter the power sector.
In 2006, the group sold its 1,000MW Rosa Power Supply Co. Ltd in Uttar Pradesh to Reliance Energy Ltd, owned by the Reliance-Anil Dhirubhai Ambani Group. The next year, it sold Bina Power Supply Co. Ltd in Madhya Pradesh to Jaiprakash Associates Ltd.
The third power plant near Ennore in Chennai, which would have used imported liquified natural gas from Qatar, was wound up in 2006 after delays in state government clearances.
Grasim Industries Ltd, the group’s flagship company, and Indo Gulf Fertilisers Ltd (now under Aditya Birla Nuvo Ltd) were the main promoters of the earlier projects.
The group has experience in power generation—it manages 10 coal-based captive power plants that feed 742MW to its aluminium smelter at Renukoot in Uttar Pradesh.
Purchasing a project in Chhattisgarh will also enable the plant to easily access coal mines and reduce transportation costs.
Analysts tracking the sector say the group should also have an integrated plan with both generation and distribution of power for faster returns.
“It makes sense if they have future plans to go beyond generation to other segments of power like distribution as a stand-alone investment in generation will end up being an expensive buy,” said Arun Kumar, research head (infrastructure group) at Brics Securities Ltd, a Mumbai-based brokerage.
Distribution is the key component in the power business, which is a volume business instead of being margins driven, he added.
Kaustav Mukherjee, partner at global consulting firm AT Kearney, said it may be overly optimistic for promoters to build power plants based on current financials, predicting a fall in merchant power rates in three-four years, which would trigger consolidation in the sector.
“Aditya Birla Group’s strategy to purchase power plants is an option in the overall strategy of entering the power business, but the margins and profitability will depend on technology used and operational efficiencies,” he said.
The key attraction for promoters building power plants currently is the high return from the merchant sale of electricity to industrial units.
The sale of power for commercial or industrial use is unregulated, while that to electricity boards is governed by state regulators.
“Most of the valuers of generation assets are likely to factor in a higher price for merchant power,” said Kumar, who headed a team at credit rating agency Standard and Poor’s that worked on a project in 2006 for the Union power ministry and Power Finance Corp. Ltd to devise ways to bring down transmission and commercial losses in urban areas to below 15%.
Returns from the power business, currently at 15.5%, are expected to decline in three years after NTPC Ltd, the country’s largest power company, starts selling 10% of its electricity to industrial units and also as more merchant power capacity comes online, Kumar said.
NTPC, which is planning to raise money through a second public offer of equity, plans to build plants of 3,400MW capacity by 2012. In the private sector, Adani Power Ltd, Indiabulls Power Ltd, JSW Energy Ltd and Jindal Steel and Power Ltd are among the large firms building power plants for merchant sales.
The country, which was producing 154,000GW (1,000MW) of power until September 2009, plans to raise its capacity to 190,000GW by 2012, 285,000GW by 2017 and 800,000GW by 2032, according to the Planning Commission.