Move to sell the 1,400MW plant once it becomes fully operational is part of a plan to divest assets not central to L&T's main businesses
Mumbai: Larsen and Toubro Ltd (L&T), India’s largest construction and engineering company, is likely to sell its 1,400 megawatt (MW) thermal power plant worth ₹ 9,600 crore in Punjab once it becomes fully operational, as part of a plan to divest assets not central to its main businesses, several people close the development said.
One analyst estimated that the sale may fetch L&T as much as 27% less than the amount invested on the project.
The second 700MW unit of the plant in Rajpur in Patiala district is expected to be commissioned within a month, they said, requesting anonymity.
The Rajpura plant is the only power project of L&T that’s being built by its wholly owned unit Nabha Power Ltd.
The first 700MW unit was commissioned on 8 December and the firm plans to complete the commissioning of the second by March. Nabha Power was initially started by the erstwhile Punjab State Electricity Board for the development of the Rajpura project in 2010.
“As per schedule, it (commissioning of the second unit) is in April, but we are trying to do it in March," Shailendra Roy, whole-time director at L&T, was quoted as saying by the Press Trust of India at the inauguration of the first unit in December.
L&T is trying to speed up the project’s completion to hasten the divestment.
“The project cost has been high and it directly impacts the net worth of L&T," said one of the people. “It makes sense for the company to sell the plant instead of waiting for the cash flows and deploy the proceeds for other ongoing and future projects."
L&T did not respond to emails sent on 24 February.
The estimated capital outlay for the Rajpura plant is ₹ 9,600 crore.
“In case of thermal power plants, every megawatt should ideally fetch ₹ 5 crore in the market," said Samir Bahl, head of investment banking at Anand Rathi Financial Services Ltd, a brokerage. That would fetch L&T around ₹ 7,000 crore for the 1,400MW plant, much lower than the investment on it.
L&T has been trying to boost its earnings per share (EPS), another person said, which is estimated to be around ₹ 8.645 (stand-alone) for the first quarter of fiscal year 2015, according to Bloomberg. Stand-alone EPS for the firm stood at ₹ 13.40 in the December quarter.
“The company had a plan of building a 3x700MW plant in Rajpura, but shelved the plan of coming up with the third unit to avoid hurdles pertaining to approvals and clearances," the second person said. “It is the right time for L&T to come out of the project and it should be able to find good buyers as the supply of raw materials has already been put in place."
Earlier this month, the Canada Pension Plan Investment Board received approval from India’s Foreign Investment Promotion Board (FIPB) to invest about ₹ 2,000 crore in L&T Infrastructure Development Projects, which is executing several projects in infrastructure segments such as roads, metro rail, ports and power transmission lines.
“There are some international utilities, particularly from the European and South East and Far East Asian regions, that are actively examining potential acquisition and investment opportunities in the power generation space in India," said Rajesh Samson, partner, transaction advisory services, infrastructure, industrial and consumer, at EY, the consultancy and audit firm formerly known as Ernst and Young.
Foreign investors by and large are more interested in acquiring projects that have already started commercial operations, Samson said, because they realize that development and construction risks in India for such projects were substantial.
India needs around 15,000-20,000MW of fresh capacity every year to sustain economic growth, EY said in a 18 December report. To achieve it, $230 billion in investments is needed in the power sector in the next five years.