India's Adani Power to acquire Lanco's Udupi plant

And everyone was taken by surprise.

As per a filing with the Mumbai Stock Exchange (BSE), Lanco Infratech has announced that it has sold its Udupi Power Plant (1200MW) to Adani Power (APL) in a deal valued at >INR60bn.

According to a research note from Nomura, Lanco expects to receive ~INR20bn in cash and APL will take over the Udupi project’s long-term debt of ~INR40bn.

From Lanco’s perspective, the sale of the Udupi project within 2QFY15 has been well anticipated and the indicative consideration is also not a surprise.

Lanco had to conclude Udupi’s sale at the earliest to receive further tranches of funding under its CDR exercise.

Nevertheless, the stock should react positively, in Nomura’s view.

Here’s more from Nomura:

APL’s acquisition of Udupi is arguably a surprise. In this context, APL’s initial stock reaction is likely to be positive, although we believe that the terms and conditions of the deal are critical, particularly in regards to: 1) funding of the deal; and 2) receipt of the receivables (ie, who retains the receivables and the interest thereon).

The EV of ~INR60bn implies Udupi is valued at ~1x book or ~1.1x book on the approved project cost of INR56bn as per the Central Electricity Regulator’s (CERC) February 2014 final tariff order for Udupi’s 1080MW PPA with the Karnataka discoms (distribution companies).

As of FY14, APL’s cash & equivalents stood at INR9.4bn (vs INR20bn equity required for the deal) implying APL will need to raise funds for the deal.

APL’s total debt as of FY14 was INR441.5bn (6.6x net debt/equity).

The receivables on the books of Udupi stood at INR18.5bn as of FY14 on the back of an impasse on tariffs between the Karnataka discoms and Lanco.

It will be critical to see who retains the receivables (and interest thereon).

If APL retains the receivables, the initial INR20bn cash outflow to Lanco may well be recovered in 1-2 years provided that the CERC’s final tariff comes into effect (currently under litigation in the Appellate tribunal).