New Delhi: In an indication of growing stress in the Indian power sector, Lanco Infratech Ltd has decided to exit hydropower generation and is in talks with SN Power of Norway for selling its stake in the business.

“The talks are on with SN Power for Lanco’s hydropower business," a person aware of the development said, requesting anonymity. “It will all depend upon the valuations."

“SN Power has shown interest in the company’s (Lanco) hydropower assets," said a Mumbai-based investment banker, who also declined to be identified. “They have been keen on acquiring hydroelectric projects in India and Nepal."

A Lanco Infratech spokesperson declined comment.

“You will have to ask Lanco Infratech Ltd if they have decided to exit the hydropower generation segment," an SN Power spokesperson said by email. “We do not give comments on other companies."

Lanco’s decision comes at a time when the company is laden with a debt of 28,036 crore as on 31 March, which increased by some 90% from 14,679 crore in 2010-11.

High fuel costs and low capacity-utilization levels are imposing financial stress on Lanco. Although income from operations rose by a robust 39.4%, operating profit contracted 12.3% in 2011-12 as high fuel and interest costs crimped earnings. High fuel prices led to a 68% rise in raw material costs. Interest costs rose 39% to 1,053 crore, which dragged the company into losses. It reported a loss of 112 crore in the year ended 31 March.

To protect earnings, Lanco Infratech has to cut debt, and run power plants on cheaper fuel and at favourable utilization rates.

“Divestment of asset (road projects and hydro assets) can lead to a meaningful re-rating of the stock as balance sheet stress will decline," said a 31 May report by ICICI Securities Ltd.

Mint reported on 14 February about Lanco Infratech’s decision to exit the wind power segment and the mandate given to Ernst and Young for selling the business.

SN Power has formed a consortium with Tata Power Co. Ltd in 2009, which plans to “set up joint ventures for developing hydropower projects in India and Nepal", according to information available on Tata Power’s website.

Another investment banker said Lanco has been looking for a strategic partner for its hydropower business for some months now. The company is also looking at raising capital at its build-operate-transfer project level by diluting stake, he added.

“The plan is to utilize the capital raised from these to fund ongoing projects. The company is seeking to raise about $300 million," he said on condition on anonymity.

Lanco plans to have a total installed capacity of 15,000 megawatts (MW) by 2015. Lanco has a total hydropower project portfolio of 1,242MW spread across India and Nepal.

The Indian power sector is battling a crisis due to scarcity of funds, environmental issues, fuel shortages, resistance from local communities to give up land, and the worsening financial health of state electricity boards.