Harshvardhan Dole, vice president – institutional equities, IIFL says the debt to equity ratio is likely to be in double digits once the company’s deal with Avantha Group goes through. Adani Power will be acquiring Avantha group's Korba West Power for an enterprise value (EV) of Rs 4200 crore. The power plant is a wholly owned subsidiary of Avantha Power. Below is the verbatim transcript of Harshvardhan Dole’s interview to CNBC-TV18’s Sumaira Abidi and Reema Tendulkar
Reema: Let us first talk about Adani Power. Do you like the acquisition that they have done of Korba Power Project, what does it add to Adani Power and how would you react to the valuations?
A: Prima facie what we read from the media and the release that some of the key shareholders of the company has put out on the BSE site is this 600 megawatt thermal power plant has been acquired at an enterprise value of Rs 4200 crore. That implies an EV of almost Rs 7 crore a megawatt largely in line with the capex that we have seen for some of the upcoming power projects.
What we will be keenly watching out as to how this power SPV has been funded in terms of debt-equity and how much of the PPA will actually translate into a meaningful ROE, before one can put forward whether this is value accretive or EPS dilutive for Adani Power.
As of now we are keenly watching the final contours of the deal and we would surely tweak our numbers once final details are out.
Sumaira: Irrespective would it worry you at all that the company has the bandwidth to take on any sort of debt given this comes on the heels of acquiring the Udupi plant?
A: I will certainly agree with you that once Adani Power consummates this particular transaction, the debt equity will be surely in double digits and there is no denying that unless the CERC’s compensatory tariff is implemented and that too retrospectively, the company would need to come and raise equity in a given period of time. So what is key for this acquisition is, one, they will have to insure that the CERC’s compensatory tariff for the Mundra units as well as the Maharashtra Electricity Regulatory Commission’s (MERC) compensatory tariff for Tiroda unit are implemented in totality and that too retrospectively. So that should ease out the stress on the books to us. Feeling which I think dilution at the Adani Power level seems to be the other option for the company.
Sumaira: Irrespective would it worry you at all that the company has the bandwidth to take on any sort of debt given this comes on the heels of acquiring the Udupi plant?
A: I will certainly agree with you that once Adani Power consummates this particular transaction, the debt equity will be surely in double digits and there is no denying that unless the CERC’s compensatory tariff is implemented and that too retrospectively, the company would need to come and raise equity in a given period of time. So what is key for this acquisition is, one, they will have to insure that the CERC’s compensatory tariff for the Mundra units as well as the Maharashtra Electricity Regulatory Commission’s (MERC) compensatory tariff for Tiroda unit are implemented in totality and that too retrospectively. So that should ease out the stress on the books to us. Feeling which I think dilution at the Adani Power level seems to be the other option for the company.
Reema: What about Tata Power, today we got news that the CERC has approved the power generation tariff for Tata Powers Methane project. What does this mean for the company?
A: This is one project where Tata Power has one of the lowest operational risks. Large part of the capacity is already been tied up with the off takers and this is a cost plus project whereby even the fuel cost is passed on to the beneficiaries and the company earns fixed return on equity kind of return. Now this is a part of the normal tariff setting process by the CERC and the final tariff for this power project has been set as per the CERCs tariff norms. Earlier they were booking provisional tariff, now the final tariff will be set. As such this is a 1050 megawatt power plant and it adds roughly about Rs 150-200 crore in terms of normalising earnings to Tata Power’s consolidated profit. So once the final tariff is set and implemented, the numbers which so far Tata Power was booking provisionally, these will get more or less firmed up.
Sumaira: What about the JSW-Jaiprakash Power deal, how did you value that and will it be EPS accretive?
A: That is actually an interesting deal, we like that deal much more than some of the other mergers and acquisitions which have happened in the sector for the reason the acquirer company that is JSW Energy has got pretty strong balance sheet. Despite this particular acquisition their debt equity will not exceed two times. So we like that acquisition but the valuation that they have paid, they have paid a slightly higher premium than what we had expected but that also needs to be looked into the overall risk return profile of the project. 100 percent of the power is being completely contracted and one should appreciate that these are some of the finest assets in the hydropower sector that they have acquired. So the returns will be just about double digits on overall basis. I think the risk is significantly lower than some of the M&As that you have seen in the recent times. For the deal to be value accretive I think structuring number one and how finely JSW Energy can borrow in the open market that is going to be key for the deal to be value accretive from here on.
Reema: If you had to recommend a buy at current levels, which stock would it be?
A: Power Grid is the best risk adjusted play even now in this sector although the stock has gone up sharply over the last three-four months. We would still continue to believe that on a risk adjusted basis, Power Grid offers the best returns over the next three-five years, that remains our top pick.
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