The acquisition of THDC India Ltd (THDCIL) and North Eastern Electric Power Corp. Ltd (Neepco) will not test NTPC Ltd’s financial limits. But the company will have to be careful in integrating these new acquisitions to generate remunerative returns.
Together, the firms will add close to 3 gigawatts (GW) of operating power plants to NTPC. Around 2GW of power plants are under construction and several more are in the pipeline. This provides good growth visibility for NTPC.
But these projects are predominantly hydropower plants. NTPC, on the other hand, has a proven track record in building and running a large portfolio of thermal power plants efficiently.
The company runs an 800 megawatts (MW) hydropower plant efficiently (1,000MW equals 1GW). But as demonstrated by another listed hydropower producer NHPC Ltd, hydro projects are susceptible to execution delays. Inordinate delays in the construction of NHPC’s hydropower projects have resulted in sub-optimal returns.
THDCIL and Neepco are also facing similar problems, though at varying degrees. Neepco’s 600MW Kameng hydropower project in Arunachal Pradesh is delayed for several years now. THDCIL has around 1.4GW of power plants under construction. Most of them are expected to be commissioned in FY23.
With significant amount of funds in capital work in progress (CWIP), timely execution and commissioning is crucial. According to analysts, the reported return on equity (RoE) of Neepco is impacted by high CWIP in recent years. While RoE of THDCIL is relatively better, the firm also has high CWIP, says analysts.
Further, as SBICAP Securities Ltd points out, performance of the operating power plants of both the firms is not up to the mark either. THDCIL’s plants are seeing high operations and maintenance costs, while Neepco’s plants are facing availability issues, which is impacting cost recovery.
Comparatively, NTPC demonstrated better expertise in running its hydropower plant, which should help it beef up the performance of THDCIL and Neepco’s operating power plants. But how well NTPC can execute under-construction hydropower plants remains a question mark.
Of course, NTPC is well placed financially to purchase THDCIL and Neepco. The government is yet to finalize the valuation of these firms. Analysts peg the acquisition cost in the range of ₹10,000-14,000 crore for NTPC.
With debt-to-equity ratio of less than two times and annual free cash flow of around ₹16,000 crore in FY19, the company is well placed to fund the acquisition. “We find both additions to be earnings accretive for NTPC at the fair value and with NTPC’s strong balance sheet and annual profits of ₹10,000-12,000 crore these are easily funded from 2-3 years of internal accruals," analysts at JM Financial Institutional Securities Ltd said in a note.