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Adani, Jindal Group Cos, Vedanta in Race for IL&FS TN Power

Major Indian Power Companies Bid for IL&FS Power Plant Assets – Industry and Retail Investor Implications

Source and Citation: Originally reported by ET Bureau in The Economic Times on January 15, 2024.

Analysis for Layman

The Infrastructure Leasing & Financial Services (IL&FS) group is selling its 92% stake in a large coal power plant business called IL&FS Tamil Nadu Power Corp (ITPCL) through an auction process. ITPCL has ₹10,000 crore of debt and owns two operating power plants and land to develop more capacity. Major power companies like Adani, Jindal, and Vedanta have bid alongside investment funds to buy ITPCL. This sale is part of IL&FS’s court-approved debt resolution process. The winning bidder will have to take on ITPCL’s debts and unpaid bills. The sale process may take 3-6 months due to needed approvals. ITPCL recently restructured some debt to continue operating normally during the sale. The buyer can expand ITPCL’s operations over time.

Adani, Jindal Group Cos, Vedanta in Race for IL&FS TN Power

Impact on Retail Investors

This news can impact retail investors in the power sector. Shares in companies bidding for ITPCL like Adani Power, Jindal Power, and Vedanta may see price movements. If perceived as a sound purchase, share prices could rise on positive investor sentiment. But overpaying could worry investors and lower share valuations. Investors should watch for the final sale price and acquisition terms to gauge the real market reaction. Beyond the bidders, the improved finances and capacity growth for ITPCL under new ownership would benefit equipment suppliers, coal companies, transmission firms, and industrial consumers in the region. So shares in related companies like BGR Energy Systems, Coal India and Power Grid Corporation of India could also be impacted. Retail investors should monitor the fallout from this privatization, as it may spur reevaluations across the Indian power industry. More asset sales could occur as financially weaker power producers struggle with debt overhangs. The winning precedent from this competitive IL&FS auction may attract greater private sector interest to these situations going forward as well. So power industry exposure can give retail investors timely opportunities, but requires research on the soundness of asset valuations, debt levels, and long term competitiveness.

Impact on Industries

The sale of ITPCL will impact several industries. The immediate benefit goes to IL&FS itself, raising capital to pay lenders and creditors under its court-supervised debt resolution plan. India’s stressed asset investors will follow this deal as a template for future opportunities. For thermal power, the ITPCL sale introduces a major capacity addition opportunity for the winning bidder alongside the inherited challenges of upgrading existing plants. Domestic coal and renewable energy producers also gain a large new potential customer. Related transport industries including rail, shipping and port operators would see higher volumes as the plants ramp up production over time. Businesses in the Cuddalore region specifically could benefit from this investment and expansion of ITPCL’s facilities. In the long run, accelerating activity for coal power generation could negatively impact India’s solar, hydro and wind industries if it diminishes India’s commitment to clean energy investments for the future. But near term, IL&FS progressing its court-ordered obligations takes priority.

Long Term Benefits & Negatives

This privatization can have long term benefits if the new owners modernize ITPCL’s assets and operate them profitably. As coal remains vital to Indian electricity self-sufficiency near term, upgrading these plants promotes national power independence and grid reliability. If properly maintained and competitively run, the 1,200MW of existing capacity plus land for 2,000MW more provides essential baseload generation and stabilizes local prices for decades. Profitability via higher efficiency would enable ITPCL to reopen and support its captive Indonesian coal mine – further securing long term fuel supply without relying solely on imported coal’s volatile global prices. In an ideal outcome, the plants sustainably generate reasonable returns without burdening Tamil Nadu consumers via inflated tariffs. Local economic activity, employment and tax revenues would also see long term gains. However, there are risks if the acquisition proves uneconomical for the new owners over time. Rehabilitation costs after years of losses and financial distress could exceed expectations. India’s long term electricity demand growth also remains uncertain. If tariffs stay high or competitive dynamics shift, the plants could risk becoming uneconomic “stranded assets” – as seen earlier in India’s power sector struggles. Persistent losses might compel the new owners to eventually close capacity. But given the promising location, dedicated coal linkage and bidders’ scale and resources, commercial viability seems achievable if managed prudently. The other long term downside persists in further entrenching India’s reliance on coal power. As the world moves to limit emissions, India could eventually face external trade, policy or tax pressures based on uncontrolled carbon and particulate pollution from aging coal plants.

Short Term Impact Benefits & Negatives

The primary benefit in the 1-2 year timeframe from this privatization would be IL&FS drastically accelerating its resolution process. Removing one of its largest distressed holdings unblocks capital to repay creditors and restores confidence that IL&FS can successfully unwind despite its past financial mismanagement. For the winning bidder, integrating these strategic assets offers synergies to enhance short term performance. Adani, Jindal and Vedanta are uniquely positioned owing to their scale, adjacent portfolios, and management track records. Their expertise could quickly raise plant availability, utilization rates and cash generation via process improvements – provided they avoid overpaying initially. ITPCL itself sees short term relief through the recent ₹4,700 crore debt restructuring – clearly signaling commercial viability to the open bidding. Ongoing operations also avoid the disruption of suspending such vital public infrastructure during the transaction. Tamil Nadu in particular requires this capacity today and into the coming years. Thus the deal structure allows asset continuity between IL&FS and the new owners. Conversely, risks exist in the potential complexity of this carve-out transaction. Untangling shared responsibilities between ITPCL and other IL&FS group entities could complicate legal separation. Approvals from multiple stakeholders add uncertainty on timelines. Delays might unsettle lenders, Tamil Nadu authorities, customers and staff. Bidder diligence must also ascertain if immediate upgrades like pollution control systems are needed – possibly pressuring short term margins after the capital expenditure. But overall the incentives align for expediting this value-accretive divestment versus allowing uncertainties to persist. Thus for IL&FS there is no real alternative, while bidders have assessed near term execution challenges for such coveted assets. Hence financial markets can take comfort as this necessary divestment proceeds.

Companies Impacted by Potential Acquisition of IL&FS Tamil Nadu Power Corp.

Indian Companies:

Gaining:

  • Adani Power (NSE: ADANIPOWER): One of the leading contenders for ITPCL, acquiring this asset could significantly increase their power generation capacity (by 58%) and market share, strengthening their position in the sector. Market sentiment might improve upon confirmation of a bid, potentially boosting stock price.
  • Jindal Power (NSE: JINDALPOWER): Similar to Adani, acquiring ITPCL would significantly expand their capacity (by 92%) and potentially improve operational efficiency with the captive jetty and coal mine. However, their recent NCLAT setback regarding Tuticorin Coal Terminal might raise concerns about their bid’s success.
  • Vedanta Ltd. (NSE: VEDL): Adding ITPCL to their existing 1,000 MW plant could further consolidate their presence in the power sector and potentially benefit from economies of scale. Successful acquisition could improve market sentiment towards Vedanta’s diversification strategy.
  • Other Bidders: NBFCs and AIFs involved in the bidding process could see increased investor interest due to potential returns from asset restructuring and future profit sharing.

Neutral:

  • IL&FS Group: Successfully selling ITPCL would help reduce their substantial debt burden and progress their restructuring process. However, the final sale price and bidder selection will determine the overall impact on their financial situation.
  • Existing Power Generation Companies: Increased competition from a potentially revived ITPCL under new ownership might put pressure on market share and tariffs for some existing players.

Losing:

  • Lenders to IL&FS: While the sale would eventually help recover outstanding debt, the final sale price and terms might not fully cover their initial exposure. Additionally, the 3-6 month timeframe introduces uncertainty and potential delays in debt recovery.

Global Companies:

Gaining:

  • Global Coal Mining Companies: Increased demand for coal due to a revived ITPCL could benefit global coal suppliers like Glencore (LON: GLEN) and BHP (ASX: BHP).
  • International Power Technology Companies: Successful modernization and green conversion of ITPCL might involve collaboration with international technology providers, potentially benefiting companies like Siemens (ETR: SIE) and GE (NYSE: GE).

Neutral:

  • Global Renewable Energy Companies: While ITPCL’s green conversion plans are positive, the continued reliance on coal in the short term might not directly benefit global renewable energy players.

Market Sentiment:

Overall, the news is likely to be positive for the Indian power sector, with potential benefits for established players like Adani Power, Jindal Power, and Vedanta. Other bidders and service providers also stand to gain. However, uncertainties regarding the final sale price, bidder selection, and potential legal hurdles might create short-term volatility. Investors should closely monitor developments and assess individual company fundamentals before making investment decisions.

Please note that this analysis is based on the information provided and should not be considered financial advice.

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