IDFC fund to buy 27% in Adhunik Power for Rs 250cr

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IDFC Project Equity Fund will buy a 27% stake in Adhunik Metalik's power unit, Adhunik Power for Rs 250 crore. Adhunik Metaliks owns about 98% in Adhunik Power. The entire investment will go towards setting up a 540-megawatt coal fired thermal power project in Jamshedpur, Jharkhand over the next two years.

In an interview with CNBC-TV18, Arun Kedia, CFO, Adhunik Metaliks spoke about the deal and gave a prognosis on Adhunik Power's business going forward.

Q: A 27% stake with Rs 250 crore would indicate a valuation of about Rs 900 crore. How much stake does Adhunik Metaliks own in Adhunik Power because your own market cap at this point of time is around Rs 990 crore?

A: Currently Adhunik Metaliks owns almost the entire share capital of Adhunik Power. It is close to about 98-99%. So post the IDFC investment that stake would go down.

Q: So this is a new stake, and it's not a divestment?

A: This is not a divestment. It is a project which is being set up. So, the money and the project company only in stages over the next 2-2.5 years. So, it is going to be fresh investment in the company and not a stake sale as such.

Q: My question relates to the investment made by IDFC. Did they buy straight equity, have they bought zero coupon convertible bonds that convert at certain levels as you reach and what is their exit option, which means in the term sheet have you committed to an IPO, have you committed to a buyback at an IRR? Exactly how is this deal set up?

A: It is a convertible instrument which gets converted later on nearer to the project completion date. We have committed to them an IPO in six years time. So the IPO will be the exit option for the investor.

Q: So I would assume this is a zero coupon convertible which converts at certain threshold points. Could you then tell us what those points are which means is it based on your performance which means let's say you cannot deliver the project by 2012 then do you have to pay them an IRR or it gets converted at a much lower price than what you are talking about today?

A: The conversion is based on certain happenings which are various milestones. So if those milestones are achieved in an economical way, then the valuation goes up. Otherwise the valuation remains where it is.

So it is not based on when project gets completed. It is based on certain milestones like coal mines starting or power sale happening at a particular rate.

So those are the kind of milestones provided in the deal structure which incentivises both sides. So if we perform more than what we have committed we get a higher valuation, and if we don't perform then the valuation reduces.

Q: What does Adhunik Power do right now? Are they already generating power or is this money going to a project which will be setting up the first power unit?

A: This is the first power unit which Adhunik power is setting up at Jamshedpur Jharkhand. It is a 540 megawatt coal fired thermal project and this entire investment will go into the company starting from now over the next 2-2.5 years. Currently, the project's commercial generation date is January 2012. So this entire money will go in the project company.

Q: So if that is the case, is the stake of IDFC really 27% or it could vary based on when the conversion takes place? Also on the merchant tariff you are calculating at about Rs 4-5. There is some concern in the market that so many plants are coming on stream by 2012-2013 that it may not be possible to charge Rs 4-5.

A: Our feeling is that power is a business which is dependant on many critical factors. There are a lot of big issues like land, water, fuel which needs to be tackled before a power plant starts generation. We have all those factors in control and the power plant is actually in construction.

So although many people have announced big plans but then whether those plans will come into production as per the scheduled date or not that is a big question mark.

As far as we are concerned our implementation and construction is in full swing. It is actually before schedule. We are very confident that we will start generation from January 2012. By which time we feel there is still going to be a very robust merchant market playing out and our business plan assumes a sale price of around Rs 3.50-4, which should give us a very decent profit in the first year itself.