GMR puts Emco Energy up for sale to reduce debt

MUMBAI/BANGALORE: Four years after acquiring Emco Energy Limited to get a toehold in the western Indian states, infrastructure conglomerate GMR has decided to exit the venture by putting it on the block.

This is part of its ongoing portfolio recycling that has already seen the highly indebted group exit a handful of road projects in India and mining and power ventures overseas to deleverage its stretched balance sheet.

GMR has mandated global investment bank JP Morgan to help sell the recently commissioned Emco Energy asset, several people with direct involvement said. They also add that early discussions have already been initiated with several global and local utility companies as well as infrastructure buyout funds. GMR Energy – the energy subsidiary of the listed GMR Infrastructure -- owns 100% in the project.

Emco is a 600 mega watts (MW) coal fired project located in the Chandrapur district of Maharastra. In August this year, the 2x300 MW plant was fully commissioned and got synchronised with the grid. It is GMR’s first thermal project to commence commercial generation. What makes Emco attractive to potential suitors is that EMCO has signed fuel supply agreements (FSAs) for the entire 600 MW primarily from Coal India and from imported sources via the “pooling mechanism.” It has long term power purchase agreements already in place for 400 MW with Maharashtra and Dadra & Nagar Haveli and is in advance negotiations with the Tamil Nadu SEB for the off-take of another 150 MW.

According to company officials, the total project cost is Rs 3948 crore ($658 million), out of which Rs 880 crore is the equity while the rest has been funded by debt from Indian lenders like Axis Bank. Sources said GMR is expecting an enterprise valuation of 1.5 to 2 times the equity book value of the project, translating to Rs 4388 crore to Rs 4828 crore. At the end of Q2 FY14, Emco has been generating Rs 1730 crore in topline.

A GMR spokesperson responded to ET’s queries by saying as a matter of policy, the company would not comment on speculation.

“There will be enough takers for Emco since it is an operational asset with signed FSAs and PPAs. Investors are looking for commissioned assets where the risks are all boxed in. Even infrastructure PE funds would be willing to pay a premium for such assets which are few and far between,” said Vibhor Singhal, infrastructure analyst at PhilipCapital.

Investment bankers tracking the particular development and the sector agree. “Global players like Abu Dhabi’s TAQA or GDF along with utility companies from Singapore and Malaysia like Sembcorp and Genting Group have increased their focus on India. Some are even looking at partnerships if not full buyouts. Local players like JSW Energy or CESC too are scouting for growth opportunities but are extremely conservative in their valuations,” said a Mumbai-based energy sector banker.

One of the sources mentioned above, said GMR and its advisors have sent feelers to Hinduja Group and Actis Private Equity among others. While the former has revived its power business and is building a plant in Andhra Pradesh, the later has a specialised infrastructure fund. Responding to ET’s email query, an Actis spokesperson said, “its not our policy to comment on market speculation.”

“We are evaluating several prospects for potential acquisitions. Our target is to reach 10,000 MW through organic and inorganic expansion. But on this specific project, the matter has still not reached the board,” Ashok P Hinduja, Chairman, Hinduja Group of Companies (India) told ET.

PORTFOLIO REJIG

Since last one year, GMR – hamstrung by its ballooning debt – has adopted a new strategy of portfolio review. It involves developing, building, creating value, divesting and reinvesting in new projects. The company calls this the ‘Asset Light Asset Right’ approach and has been proactively divesting assets, which in turn has been freeing up cash for newer investment opportunities and paring down the consolidated debt. In 2013, it has already sold 2 highway assets to PE players, controlling interest in its flagship power plant in Singapore – touted by many as a jewel in its crown and stakes in its mining operations in South Africa.

As per Credit Suisse estimates, in FY 13, the consolidated group debt stood at Rs 41,000 crore– making it one of the top 10 indebted groups across India Inc. The company’s losses in the infrastructure segment widened to Rs 393 crore in the second quarter ended September 2013, against Rs 179 crore in the same quarter last year. Out of that, the energy segment alone posted an Rs 318 crore loss.

“The Chattisgarh power project remains the only under construction asset in GMR’s portfolio. While operationalisation of assets is likely to improve cash flows, it will also boost the company’s strategy of asset sale,” wrote Shankar.K and Parvez Akhtar Qazi, infrastructure analysts with Edelweiss, last month.

But what is interesting is the fact that GMR is also parallely planning to list its energy vertical that has existing marquee PE investors like Temasek, IDFC with a Rs 1000 –Rs 1500 crore IPO. It had already mandated Bank of America Merrill Lynch and Macquarie for the exercise. “ It’s clear that GMR wants to cash out of all the projects once they are ready. But if you sell your jewels, what will you be left with? And what would that do to the IPO process,” asked another infrastructure company CEO on condition of anonymity.



ENERGISING PORTFOLIO

* Emco Energy: 600 MW coal fired plant in Maharashtra; fully commissioned * GMR acquired unit in 2009 * FSA with Coal India in place * PPAs with Maharashtra, DNH signed (400 MW); in advance negotiations with TN SEB for addl 150 MW. * Project cost: Rs 3948 crore * Average PLF: 65% approx (Sept quarter), highest among all 4 operational units in GMR’s power portfolio. *Currently, co has 2,136MW of operational power assets & 5,043MW under implementation ·FY’14 H1 Power Sector revenues: Rs 1595 cr ·FY’14 H1 Power Sector Losses: Rs 684 cr ·Group net debt (as on Sept 2013): Rs 38,000 cr