Power sector is one of the prime utility sectors in the world. Power demand increases every day due to the growing consumption of electrical & electronic devices and makes the power generation (supply) to follows it behind, not letting to cross over. Power is the key source to boost the manufacturing or industrial sectors and the home country is responsible to provide economic and uninterrupted power. Therefore the government encourages power developers (both private and public limited companies) to develop power plants. In India, Ministry of Power supports the power developers by preparing a 5-year plan which includes the trend of power demand, present supply, new power plants, etc. Based on the source of new power plants (such as solar, thermal, etc.), developers start to approach the projects.
Yes, power is mandatory for a country and consumed every second however, from the power developer’s point of view, making money in power sector is not as easy as it looks. Considering the current slow market trend, the companies in these sectors are following an alternate way of making money. Setting up a plant and earning money from the power units is the core of this business. However now, selling a power plant or stakes in power plant becomes an optimal solution to cover up the overflowing debt of companies.
The strategies behind these business transactions are listed below:
Benefit for Indian power developers
- To balance debt: Selling stakes of power plant gives the company immediate funds to recover the huge debt of capital investment. Power generation needs huge amount of capital investment for setting up a plant. Additionally, the floating interest rate of loans further increases the debt. So, to reduce the debt companies will sell the stakes of power plant to potential investors. For instance, Jaypee group sold stakes of two power units to Abu Dhabi National Energy Co. PJSC (also known as TAQA), Canadian pension fund and IDFC alternatives for USD 1.5 billion during Dec 2014. (For more details read here). This fund will help Jaypee group to balance their existing debt of INR 50,000 crore (USD 8.3 billion).
- Less profit from the plant: Power plants are constructed based on the theoretical estimations. However, sometimes, when the real time scenario doesn’t allow the company to earn the forecasted money then they prefer to sell off the power plant slowly to various investors (step by step). It’s like selling of invaluable assets in 4 or 5 pieces.
Benefit for investors
- Easy entrance to a market: Installing a power plant need a minimum of 5 years in India, starting from design to commissioning. These tenure various depending on the type of power plants i.e. Hyundai power plant will take 7 years for construction and commission. In other cases, it may also extend due to pending approvals from government departments. So instead of investing in new power plant, many investors prefer to buy installed power plant to enter the competitive Indian power industry immediately.
- Operating power plant - Low risk: Investors prefer to choose installed and operating power plants over new plants. An operating power plant might have witness all the worst possible scenarios during the operating tenure and hence it’s easy to determine the operation risk and its cost. If the operational cost is less, then the turnover from the plant will be good.
- India is good place to invest: Every wealth nation is eyeing on India due to unexplored youth force and unsaturated sectors such as Power, Oil & Gas, water, drainage or sewage, aviation, manufacturing sectors, etc. The average age of Indians now is 24years and they are let to be used for India’s productivity. Since India’s youth force is fresh, they will be cheap and can be used for any type of work. Financial sectors like banking and insurance are also yet to reach the global standards. Therefore, if a company lands their foot in Indian power industry through buying stakes in power plant then it will help them to invest more in the future, after understanding the Indian way of working.
Executive director and head of infrastructure at Kotak Investment Bank, Mr. Sanjay Sethi stated – “One can see a lot of action in the power sector as far as mergers and acquisitions are concerned; many PE (private equity) funds and sovereign funds are looking at the Indian power sector with a lot of curiosity as they feel valuations are attractive”. He emphasizes that Indian market is attractive for equity investors.
Therefore, due to slow movement in power industry, the power developers are shifting their focus in selling existing plants rather than focusing on developing new power plants.
