BackAdani Power: adding capacities may make fund-raising inevitable
The Udupi and Korba deals will cost Adani Power Rs10,200 crore, audacious considering the headwind the company and the sector are facing
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Despite its precarious financial condition, Adani Power Ltd is leading the consolidation in the Indian power sector. Even as the purchase of the 1,200 megawatts (MW) Udupi power plant is under way, the company announced the acquisition of Korba West Power Co. Ltd.
Korba West has a 600MW coal-based power plant and is adding more capacities. The firm is valued in excess of ₹ 4,200 crore. The Udupi deal has been done at ₹ 6,000 crore. Together they will cost Adani Power ₹ 10,200 crore, audacious considering the headwind the company and the sector are facing.
Further, Adani Power says that it aims to seize more opportunities to add capacity and expressed confidence it will achieve a target of generating 20,000MW by 2020. The latest acquisitions will take the company’s installed capacity to 11,040MW.
The capacity additions would not have been a bother if Adani Power was generating sufficient money to fund the acquisitions. But that is not the case. The company’s major power plants are facing issues related to tariffs or purchase agreements, leading to losses at the consolidated level.
The situation has become so precarious that some analysts doubt if some of the company’s power plants will make a profit even if the compensatory tariff orders are passed in its favour.
“Even with the compensatory tariffs, these projects are likely to make losses, which means value for equity holders of Adani Power is unlikely to be created," Emkay Global Financial Services Ltd said in its fiscal second quarter results review.
From this context, it is difficult to understand how the company plans to fund future capacity additions. After the latest acquisitions, the debt-to-equity ratio is estimated to cross 10 from around seven in March. That leaves limited bandwidth for future expansion.
According to Nomura, Adani Power’s consolidated debt—including working capital and loans from the promoter—stood at ₹ 47,100 crore in September, up from ₹ 44,100 crore in March. The sharp rise is intensifying the financial pressure.
Adani Power may be adding capacities to attain greater economies of scale, says an analyst with a domestic broking firm. It can bid for a large coal mine and feed its fuel-starved plants. The strategy may be well thought out. But how the company plans to overcome the tariff and fund constraints in the meantime is not yet known.
Infusion of fresh equity funds will help ease the financial pressure. It would require hard selling as it is not yet clear when Adani Power’s troubled power plants will start making money.
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