It was Hobson’s choice for Jaiprakash Power Ventures Ltd (JP Power). Given its cash flow pressures (and the huge debt burden of its parent Jaiprakash Associates Ltd), the company had no option but to sell assets as soon as possible. The cut in earnings per share estimates by brokerages is a given; after all operating assets are going to be sold. But the disappointment for investors is the lower-than-expected valuation for the Karcham Wangtoo and Baspa hydropower plants, two of the juiciest assets in the group. The 15.51% fall in the stock price on Monday thus reflected not only profit booking but also investor displeasure.

JP Power is expected to get 3,820 crore cash for the deal and also sign away debt worth approximately 6,700 crore. That translates into 1.5 times the original equity invested by the company in these two assets which earn a high return on equity (RoE). If one considers the securitization of Karcham’s receivables worth 1,400 crore and cash flow of 370 crore till November—per Credit Suisse estimates—implied equity valuation of the deal is 5,590 crore. The brokerage says that even at this higher implied value, the assets were sold at 1.15 times their estimated book value for November (the expected date of completion for the deal), at a discount given their 18-20% RoE.

The cash is welcome. JP Power needs to fund equity in some projects under construction. The Bara and Nigrie plants need some 1,600 crore over the next financial year and the management had earlier ruled out equity dilution to raise cash. But then the deal also changes the very face of the company. After the deal it will have just 400 megawatt (MW) hydropower capacity. In the medium term, when Bara and Nigrie get commissioned, it will have thermal coal capacity of 3800MW.

That means the company is exposed to the uncertain environment inhabited by the rest of the thermal power sector in India with fuel linkage and environmental clearance problems. The first phase of its operational Bina power plant is not recovering its fixed costs fully, says HDFC Securities Ltd. There are fears of cost overruns in the Bara project which may lead to a continuing cash flow gap despite the asset sales. Any delay in the commissioning of these projects will further affect the balance sheet. Clarity on these issues will be triggers for the stock.