India's Adani Power to acquire Korba West Power

Is this a good move?.

It has been announced that India-based Adani Power (APL) has executed a binding term sheet to acquire Korba West Power (KWPCL) from Avantha Power & Infrastructure.

According to a research note from Nomura, KWPCL has a commissioned capacity of 600MW and an expansion phase is under implementation.

Furthermore, Nomura also noted that as per a press release issued by Ballarpur Industries, one of the promoters of APIL, the MoU with APL pegs the value of KWPCL in excess of INR42bn.

Here's more from Nomura:

Acquiring capacity in the ‘coal belt’ ahead of bidding for coal blocks is strategically ‘ok’, but funding/leverage and absence of PPAs are concerns.

As per the Central Electricity Authority (CEA), KWPCL’s 600MW capacity was commissioned on March 31, 2014. Furthermore, CEA’s latest available daily generation report (Nov 10, 2014) states that the unit is not yet stabilised, implying that commercial operations have not commenced.

As per our understanding, KWPCL has a fuel supply agreement (FSA) with Coal India (COAL IN, Buy) for securing 2.7mtpa linkage coal for this project (drawdown being linked to the proportion of electricity offtake from the facility via long-term PPAs).

Further, we believe that besides a MoU with the government of Chhattisgarh for supplying 35% of offtake to the state (30% on cost-plus +5% on variable-cost), no PPA has been signed as yet; we understand that the MoU is subject to ratification by the state government.

APL has 9240MW of operational capacity (zero WIP pipeline) and is in the process of acquiring Lanco Infra’s (LANCI IN, rating suspended) 1200MW Udupi project. Strategically, acquiring capacity in the ‘coal belt’ ahead of bidding for coal blocks is ‘ok’, but the absence of PPAs is a concern.

In the absence of details on the build-out of the expansion phase (600MW, in our view), and equity invested therein, it is difficult to assess the relative discount/premium on the valuation multiple which APL would be paying for this asset.

Consolidated debt on APL’s books stood at INR471bn as of Sep-2014 (INR360bn long-term loans + INR62bn loan from the promoter + INR49bn working capital loans). Net debt/equity (excluding working capital loans and promoter loans) stood at 6.3x as of Sep-2014 (8.3x including working capital loans and promoter loans).

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