Equity carve-outs in favour across power companies

Last Updated: Tue, Apr 22, 2008 11:20 hrs

Unlocking value in their power portfolios through an equity carve-out is the flavour of the month for infrastructure majors. These companies are seeing robust traction in business from new power projects that are coming up for bidding in the country.

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Companies such as Lanco Infrastructure and GVK Power & Infrastructure are in the midst of setting up new divisions for their power businesses. They are inviting strategic investors and could subsequently go for a public float to raise funds.

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For instance, Lanco Infrastructure, which had set itself a target of 15,000 mw by 2015, has reworked the figure to 17,000 mw after its wins in UP which has already taken the total capacity in the pipeline to 13,000 mw.

Likewise, GVK Power, which currently has a power portfolio of 2140 mw, is set to take it up to over 3500 mw with two brownfield expansion projects that are currently under implementation.

"We are looking to set up an intermediate holding company for power within the next 5-6 months and bring in strategic partners," L. Madhusudhana Rao, chairman Lanco, said, adding some private equity players were already showing interest.

"An equity carve out will give us the opportunity to raise money without diluting at the holding company level to fund new projects," said GVK Power chief financial officer Issac George. "We have to raise at least 20% of the total capital cost for new projects being taken up," he added.

While Citigroup analysts Deepal Delivala, Venkatesh Balasubramaniam and Atul Tiwari valued GVK's power business at 24% of the total in their March 14 report, Kotak Securities analysts Aman Batra and Murtaza Arsiwalla estimated Lanco's power portfolio at Rs 331 per share.

These estimates take into account only projects that are already into generation or those that have seen considerably progress.

Lanco is already in the process of a company-wide rejig that will see intermediate holding companies being set up for each vertical. The group, which derives almost 75% of its revenues from the energy sector, has mandated global consulting majors AT Kerney and E&Y to recommend organisational and operational changes in its power and realty businesses.

The power businesses of each of these companies are expected to have higher visibility with a plethora of projects coming up for grabs in the coming months. "We expect investors to have much more confidence in the sector and our company given the high visibility that power will give," Rao said.

A significant aspect is that most power players are looking to a higher proportion of merchant power.

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For instance, while Rao said Lanco was looking to increase the power purchase agreement (PPA) to merchant power ratio from the current 75:25 to 70:30 over the next few months, GVK's Issac George said the objective was to have enough long-term PPAs to cover the debt for the various projects and the rest to be merchant power.

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