It must take a fair amount of courage to keep on borrowing when one is already leveraged to the hilt. But what Gautam Adani, chairman and founder of the Adani Group, lacks in cash flows he perhaps makes up with his chutzpah.
With Wednesday’s acquisition of Lanco Infratech’s 1,200 MW thermal power plant in Udupi, at a value of R6,000 crore, the net debt to equity at Adani Power could cross 700%, unless there’s some quick infusion of capital.
Moreover, the consolidated gross debt of Adani Enterprises, the group holding company will increase from R72,440 crore at the end of March 2014. While the management has armed itself with an enabling resolution to raise R6,000 crore, it has clarified there’s no concrete plans to raise funds.
While the Udupi plant may appear to have come cheap — the project was completed at a cost of R6,400 crore — the plant has been beset with problems with the regulator having approved a project cost of R5,600 crore and with the Karnataka government not having paid R1,800 crore of dues.
Analysts aren’t convinced it’s a good deal, pointing out that at an equity investment of R2,000 crore, the implied return on equity is a meagre 6%, not factoring in the risk of continued under-recoveries from Karnataka.
Given the approved equity for the project is R1,400 crore, they believe Adani has paid a premium that will lower the returns.
It is possible, however, that the promoters will be able to resolve some of the issues now that the central government is keen to reform the power sector.
Meanwhile, Adani Power’s losses are expected to go up to around Rs 1,100 crore in FY15 on revenues of close to Rs 20,000 crore.
The group’s finances have been stretched for sometime now — it will pay out some Rs 6,600 crore as interest this year — but that doesn’t deter it from acquiring assets. It recently bought Dhamra Port from Larsen & Toubro and the Tata Group for an estimated Rs 5,000 crore.
Indeed, the group makes no secret of its ambitions. It says it wants to generate 20,000 MW of power by 2020 and with the acquisition of the 1,200MW Udupi power plant would have over 10,000 MW. The group is understood to have made a bid for JP Groups’ hydro-power portfolio, bought by Reliance Power at an enterprise value of Rs 12,000 crore. While there are some concerns about the power piece — how much compensatory tariff it will get, for instance, for the Mundra and Tiroda plants — the business should do well with a little help from regulators
However, the buyout, in May 2011, of the Abbot Point coal terminal in Australia appears to have run into trouble with environmentalists. Moreover, the fall in coal prices to $70 per tonne from $120 per tonne when the terminal was acquired, and the drop in coal traffic, appear to have changed the economics of the venture. The management told analysts recently the the family may sell a part of its stake to fund the capital expenditure for the port.
The management has also pegged capital expenditure at $4 billion for the Carmichael mines, which was approved in May and which has an estimated capacity 60 million tonnes; the port and rail investments are to be incurred by the family.
Adani Ports has a strong portfolio of projects on the Indian west coast other than the flagship Mundra port — a mix of brownfield port development and also as terminal operator at the major ports. This is one business where margins are expected to stay at over 61%, leaving cash flows strong.