New Delhi: Overseas utilities including Electricité de France SA (EDF), GDF Suez SA, Germany’s E.ON AG, Tokyo Electric Power Co. (Tepco), Korea Electric Power Corp. (Kepco), and Malaysian state fund Khazanah Nasional Bhd are actively scouting for stakes in Indian power projects, seeking to derive value from stressed assets, said people familiar with the development.
Signalling their seriousness of intent, these companies are preparing to award mandates to Indian consultants for potential purchases at a time when the Indian sector has shown signs of consolidation, driven by high fuel costs and low capacity utilization that have built up financial stress on power utilities.
“The assets are at a stage when they can be called stressed,” said a New Delhi-based power sector analyst on condition of anonymity. “The foreign players want technical and commercial assistance to acquire them. Some of the firms are EDF, GDF, E.ON, Tepco, Kepco and Khazanah.”
India is facing its worst coal shortage, causing power projects to run on minimal supplies of the fuel. Power projects have been the worst hit by falling coal production as they are the biggest consumer of the fuel, absorbing 78% of domestic output. It takes around 5,000 tonnes of coal to generate 1 megawatt (MW) of power.
India has 75 thermal power projects that depend on state-owned Coal India Ltd (CIL) for supplies. With the supply of domestic coal dwindling, utilities have to burn imported coal, increasing the cost of power. State electricity boards are reluctant to purchase more expensive power.
While Kepco recently opened an Indian office for tapping opportunities in the country and neighbouring Nepal, EDF has formed a team for evaluating and acquiring assets. GDF, on its part, offered a structured mandate for participation by Indian consultants for acquisition of assets.
“These companies are keen and are floating active mandates. With the concerns on fuel supply front and other issues, the days of exorbitant valuations are over,” said the chief executive officer of an Indian power sector company, who also didn’t want to be identified.
Analysts say these deals may be more attractive to potential investors now given the constraints faced by the Indian power sector that would have lowered valuations. Besides fuel shortages and cost increases, the sector is struggling with challenges in project execution and land acquisition, and over environmental issues.
A volatile stock market has, meanwhile, dried up the market for initial public offerings (IPOs). “There is no exit story in the power story through the IPO route. While the investors’ expectations have moderated, those of promoters are yet to stabilize,” added the first person quoted above.
Meeting electricity demand is key to achieving the government’s target of 7.6% annual growth in Asia’s third largest economy.
“With structural issues yet to be addressed, we remain cautious on the sector,” Credit Suisse India Research wrote in a 25 June report. “We reiterate that recent power sector reforms just aim at resolving near-term issues through rationalization of capacity additions and coal supplies. Structural issues such as expediting environmental clearances, improving evacuation infrastructure (mostly rail) and implementing power distribution reforms still need to be addressed.”
In an emailed response to queries, an E.ON spokesperson said the company had identified India as “one of our new focus regions” outside of Europe.
“We therefore have a presence in Mumbai with a team of country experts that pursues specific business opportunities,” the spokesperson said. “Please understand that we cannot disclose any further details at this point in time.”
Questions emailed to EDF, GDF and Khazanah on Friday remained unanswered at the time of going to press. A Kepco spokesperson didn’t respond to phone calls or to a text message left on his mobile phone. Queries posted on the Tepco website on Friday also remained unanswered.
“There is a lot of interest in the Indian power projects, particularly of those companies who take a high debt route to growth,” said a third person aware of the foreign firms’ plans, speaking on condition of anonymity.
Signs of consolidation have surfaced in the Indian power sector. Mint reported on 18 June that Lanco Infratech Ltd had decided to exit hydropower generation and was in talks with SN Power of Norway for selling its stake in the business.
“Overall, although near-term volatility may continue, we think it is a good time to look at the sector. We believe power sector stocks are at an interesting level for longer-term investors. A reasonable mix of defensive companies and more volatile names provides the best positioning, in our view,” UBS Investment Research said in a 27 June report.