Jaypee deal looks like a win for Reliance Power
Investors should remember that other problems for R-Power such as regulatory and fuel availability issues still persist
Perhaps the only reason why its investors would look askance at Reliance Power Ltd’s (R-Power’s) deal to buy the hydropower assets of Jaiprakash Power Ventures Ltd is the price. That has not been disclosed as the company is yet to complete the due diligence of the three hydropower generators—Karcham Wangtoo, Baspa and Vishnuprayag. Still, it is unlikely to be a valuation disadvantageous to R-Power. After all, with Taqa pulling out from an earlier deal, this is a distress sale for Jaiprakash as it tries to pare debt.
Market buzz has it that the enterprise value of the deal is around ₹ 12,500 crore. If that is the case, R-Power is getting 1800 megawatts (MW) of hydel assets at ₹ 7 crore per MW. That is truly a win considering that it takes about ₹ 8 crore per MW to set up new hydropower generating facilities with assorted headaches such as getting land, environmental clearances and so on.
What about funding? R-Power has around ₹ 2,600 crore cash on its books. It’s debt-to-equity ratio is also a comfortable 1.35 times at the end of March, giving it leeway to raise more loans. Assuming it has to raise ₹ 10,000 crore loans (part of this would be no more than assuming existing Jaiprakash debt associated with these three plants or refinancing it), the debt-equity ratio rises to 1.86 times, a still comfortable level. While it could also raise equity, there are competing demands as well from other projects which have a significant amount of capital sunk in them and are stuck at various levels of implementation.
To be sure, R-Power could opt for a structure similar to Taqa’s and bring in private equity or strategic investors in the subsidiary, which would buy the hydroelectric plants. But clarity on these details will emerge only in time.
For now investors are happy that the company is buying assets which generate about ₹ 800 crore cash flows annually, earn a regulated return on equity and would add to R-Power’s earnings per share from day one. But they should not get carried away, given that other problems for R-Power such as regulatory and fuel availability issues still persist.
Reliance Power has sued HT Media Ltd, publisher of Mint, in the Bombay High Court over a 12 May 2010 front-page story in Mint that it disputed. HT Media is contesting the case.
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