Mumbai: American private equity fund (PE) WL Ross and Co. Llc is in talks with a Hyderabad-based unlisted firm Vijai Electricals Ltd, which makes power and distribution transformers, to invest around Rs400 crore, two people familiar with the development said.

WL Ross typically invests in financially distressed firms and makes money by selling its stake after restructuring them.

Vijai Electricals has appointed Mumbai-based investment banker IDFC-SSKI Securities Ltd to help it raise funds, one of the two persons familiar with the development said.

If the talks lead to a deal, this will be the second such investment in Vijai Electricals after British PE fund 3i Group Plc invested $25.8 million (Rs117 crore today) in the transformer maker in August 2008.

Ranjeet Nabha, managing director and chief executive officer of WL Ross India, said in an email reply: “As a policy, we do not comment on market rumours and speculations."

Graphic: Ahmed Raza Khan / Mint

WL Ross has so far invested in two Indian firms—apparel maker OCM India Ltd in October 2006 and low-cost airline SpiceJet Ltd in July 2008. Vijai Electricals will be its third investment in case the deal goes through.

In November 2009, rating agency Crisil Ltd had downgraded the 37-year-old company’s loan raising programme and non-convertible debentures to moderate safety (BBB-) from adequate safety (A-). The downgrade reflected a steady build-up of liquidity pressure for Vijai Electricals due to higher working capital requirements, delayed payments from key customers and increase in inventories, the rating agency said.

Vijai Electricals, which supplies transformers to power distribution companies, benefited from the government’s attempt during the 10th Plan (2002-07) to bring down the aggregate transmission and distribution, or AT&D, losses of state power distribution companies, said Arun Kumar, research head at Brics Securities Ltd, a Mumbai-based brokerage firm.

Under this scheme, known as the accelerated power development and reforms programme, the government gives grants to state power distribution companies that intend to reduce AT&D losses. Transformers are one of the significant components used to distribute power to individual homes.

Since these companies sell transformers to state-owned firms, there is always a problem of cash flow due to payment delays, added Kumar, who had earlier headed a team at credit rating agency Standard and Poor’s that worked on a project in 2006 for the Union power ministry and Power Finance Corp. Ltd to devise ways to bring down transmission and commercial losses in urban pockets.

Increased working capital requirements have resulted in high utilization of bank credit. This, in turn, has increased the company’s dependence on short-term loans to fund its cash flow mismatches, the rating agency said.

A combination of these factors has led to a steep deterioration in the company’s gearing and debt protection parameters. The downgrade also reflects Crisil’s belief that Vijai Electricals’ liquidity and gearing will remain under pressure until the company improves its ability to reduce its debtor days and inventory levels.

Vijai Electricals’ net profit dropped to Rs2.6 crore for the fiscal ended 31 March, from Rs64.75 crore in the previous fiscal, despite growth in sales.

According to Kumar of Bric Securities, the company can benefit from the government’s new grant of nearly Rs70,000 crore under two new projects to reduce T&D losses of both urban and rural power distribution companies.

The power sector has become one of the most attractive spaces for PE and venture capital investors. PE investments in the power sector (in terms of deal value) in the first quarter of calendar year 2010 have already surpassed the total investments made in 2009.

Since January this year, PE funds have invested $575 million in six deals in the power sector, compared with 21 power deals worth $532 million in 2009, according to data from Venture Intelligence, a research service focused on PE, and mergers and acquisitions.

C.R. Sukumar in Hyderabad contributed to this story.