IMFA soft-pedals plan to sell stake in power project
Increase in output coincides with bullish outlook
Apr 04, 2008
Economic Times

Odisha-BASED IMFA Group, India's largest ferro alloys producer, is learnt to have dropped its plans to offer a minority stake in its proposed Rs 1,500-crore, 360-MW power project to private equity players due to differences of opinion on the business model. While private equity firms IMFA was talking to, were keen on tying up the entire power sale through long-term contracts, IMFA promoters wanted at least 40% to be on merchant-sale basis to take advantage of strong electricity rates.

The Bansidhar Panda-promoted IMFA Group, with an annual revenue of Rs 700 crore, had been talking to private equity firms for the first phase of the power project, which includes a 120 MW power plant to be built at an around Rs 440 crore.

Large private equity firms, including Carlyle, 3i and TPG, are learnt to have been negotiating for a minority stake in the power project scheduled in the industrial region of Choudwar, near Cuttack. The power project will be set up by a 100% subsidiary of IMFA.

"We are veering toward the idea of going alone, of coming up with the entire equity ourselves," Managing Director Subhrakant Panda told ET. "We might consider divesting part of the equity stake in the second phase, but are close to deciding on going alone in the first phase," he added. The IMFA board is scheduled to meet in May to take a final decision on the issue.

Merchant power plants are typically units that are not tied up with long-term power purchase agreements. However, IMFA promoters have been in favour of allowing 60% of the generation to be tied up through long-term contracts while the remaining 40% could be through merchant sale.

Independent power producers usually opt for the merchant power plant route by bearing the risk. But building a merchant plant implies balance-sheet financing by the developer, as financial institutions are not comfortable with projects that don't have long-term PPAs. "There is usually a higher degree of uncertainty associated with merchant power," explains KPMG executive director Arvind Mahajan. "Since a power project takes about three years to complete, it is unclear what the prices it would fetch at that point. So private equity firms would want to have proper contract in place," he added.

Strong cash flows is another reason for the IMFA Group to go alone in the power project. Ferro chrome prices have surged by about 35% in the past two months due to power problems in South Africa, which makes half of the global output.

Valuations could also have played a key role in the negotiations with PE firms. The weak equities market has seen shares of power companies falling sharply on BSE. While the Reliance Energy stock has fallen 46% since January, Tata Power is down 23%. The broader Sensex index on BSE has fallen 22.4% in the same period.

Analysts tracking the sector say falling valuations have encouraged PE firms to defer their deals in India while promoters are unwilling to scale down prices. "Most private equity players want to wait so that valuations come down to more realistic levels," said Girish Solanki, an analyst with Mumbai-based Angel Broking.

Indian power generation firms have been raising funds to meet growing demand for electricity and most are willing to offer equity stakes. Large companies, including Reliance Power, Sterlite Energy, JSW Energy, Essar Power and Ispat Energy are expected to raise around $10 billion through various routes. India plans to add up to 80,000 MW capacity under the Eleventh Five Year Plan to meet the demand.

Private equity investment has been one of the most popular options for unlisted companies to raise funds till the recent steep corrections put a break on the trend from five deals and $20 million worth of flows in 1996, India has seen an investment of about $17.13 billion from 339 deals in 2007.

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