Kolkata: Sanjiv Goenka-led CESC Ltd—which generates and distributes electricity in Kolkata and its suburbs—on Friday announced its intention to expand nationally with a Rs200 crore acquisition of a power project in Maharashtra from a group of investors led by Pune-based Manikchand Group, a leading manufacturer of paan masala and chewing tobacco.
CESC is part of Kolkata-based RPG Enterprises.
Graphics: Sandeep Bhatnagar / Mint
The company said it had paid Rs200 crore for a 50.1% stake in Dhariwal Infrastructure Pvt. Ltd (DIPL), which has obtained “all necessary licences” and acquired 450 acres of land at Chandrapur, 150km from Nagpur, to generate 600MW of power. CESC will be acquiring the rest of the shares in the company by March next year at an “insignificant cost”.
DIPL has not started building the plant, which is estimated to cost Rs2,800 crore, according to CESC vice-chairman Goenka. DIPL has, however, secured the right to buy around five million tonnes of coal annually from South Eastern Coalfields Ltd, a subsidiary of Coal India Ltd.
“Maharashtra is the most lucrative state for power companies,” Goenka said. “At Mumbai suburban tariffs, we (CESC) would have made Rs1,600 crore in extra profits (every year).”
Having secured “a toehold in the west”, CESC is now looking to expand in the north and the south, and is eyeing unfinished power projects across India. “We definitely want more power plants,” Goenka said, adding CESC has a war chest of around Rs1,000 crore for acquisitions.
CESC’s shares rose 6.7% to close at Rs380.25 each on the Bombay Stock Exchange on Friday, while the bourse’s benchmark Sensex index gained 1% to end at 15,922.34.
Funding for the plant would be tied up by the end of the year, and if all goes well, DIPL would start generating power “within 33 months of financial closure”, according to Goenka. Up to 70% of the funds needed to build the plant would be borrowed.
Under an agreement with the state, DIPL would have to sell at least 50% of the 600MW it generates to the Maharashtra State Electricity Distribution Co. Ltd, or MSEDCL (a part of the erstwhile Maharashtra state electricity board). Though regulated by the state government, MSEDCL’s average tariff is Rs5.80 a unit (or 1kW per hour), which is significantly higher than CESC’s average tariff of Rs3.90 a unit.
To be sure, DIPL will be selling the remaining 50% that it generates at a much higher price than the MSEDCL rate. CESC expects an internal rate of return (IRR) of around 20% on its investment in Maharashtra.
“The problem with the RPG group is its projects often trail schedule,” said an analyst with a Mumbai-based broking firm, who did not want to be identified. “However, the step will certainly boost investors’ confidence because it shows CESC wants to expand nationally.”
Asked if CESC’s expectation of 20% IRR from the Maharashtra project is realistic, he said: “It is achievable if it manages to maintain high plant load factor. CESC’s current IRR is around 22%.”
Plant load factor is a measure of how well a power firm uses its generation capacity.
The firm, which currently generates 975MW at four plants in Kolkata and its neighbourhood, is almost ready to start building a new plant at Haldia in West Bengal’s East Midnapore district. It is also looking to set up power plants in neighbouring states such as Jharkhand, Bihar and Orissa. A new unit at CESC’s Budge Budge plant in Kolkata will be commissioned next month. It will raise its generation capacity to 1,225MW.
CESC posted a turnover of Rs3,199 crore and a net profit of Rs409 crore in fiscal 2009.
Meanwhile, CESC could sell up to 20% stake in retailer Spencer’s Retail Ltd—a wholly owned subsidiary—to private equity funds. “We will only sell if we get the right kind of investor and the right valuation. People are interested (in acquiring stake in Spencer’s), but we aren’t going to sell to a hedge fund,” Goenka said.
Spencer’s, which sells a wide variety of goods ranging from apparels to vegetables, has some 256 stores in 50 cities across the country. Its turnover in fiscal 2009 was Rs1,021 crore. Spencer’s had a total accumulated loss of around Rs200 crore till March.