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Adani, Jindal Power may Join Race for Hiranmaye

Acquisition of Hiranmaye Energy by Adani Power and Jindal Power: What It Means for Investors

Source and Citation: News article published by Economic Times on January 23, 2024

Analysis for Layman

Hiranmaye Energy is a thermal power generation company located in West Bengal, India. It owns three power units, each with a capacity of 150 megawatts (MW), of which two are currently operational, while one unit is still under construction.

Unfortunately, Hiranmaye Energy defaulted on loans amounting to approximately Rs 2,000 crore from lenders like REC and PFC. As a result, the National Company Law Tribunal (NCLT) has admitted the company for corporate insolvency proceedings based on a petition by REC. This legal process now allows potential buyers to bid for acquiring the company. Prominent players in the power sector, such as Adani Power and Jindal Power, have expressed interest in acquiring Hiranmaye Energy due to its attractive power purchase agreements and coal linkages. The resolution plan from the successful bidder will also help recover the dues owed to lenders.

Adani, Jindal Power may Join Race for Hiranmaye

Impact on Retail Investors

For minority investors, this development sheds light on the ongoing consolidation in the thermal power sector, with larger, more efficient players taking the lead:

  • Leading firms like Adani and Jindal are acquiring distressed assets, signaling continued policy support for domestic coal availability.
  • However, it’s crucial to note that changing environmental regulations and advancements in lithium battery technology pose long-term business risks for companies heavily reliant on coal generation.
  • Therefore, investors should carefully assess the renewable energy strategies of companies entering into thermal power consolidation to avoid potential risks associated with stranded assets in the future.
  • While short-term gains may result from improved capacity utilization, a shift towards a more balanced renewable energy portfolio is essential for sustainable growth.

Impact on Industries

The impact of this acquisition extends to various industries:

  • Thermal Power: Players like NTPC and Tata Power are likely to benefit from policy stability and assured coal availability, which will support their plans for expanding plant load factors (PLF).
  • Renewable Energy: Providers like Adani Green and ReNew may collaborate with coal generators to diversify their clean energy capacities.
  • Electrical Equipment: Companies like BHEL and Siemens can expect increased capital expenditure (capex) opportunities as energy players expand their generation capacities.
  • Metals & Mining: A positive outlook for domestic coal supply is likely to encourage investments in related mining capacities.

While the thermal power sector continues to enjoy policy support due to energy security concerns, integrating renewable energy sources becomes imperative to future-proof the industry.

Long Term Benefits & Negatives

Positives:

  • Consolidation at scale improves the viability and efficiency of stranded thermal assets.
  • Additional generation capacities contribute to meeting India’s rising power demands.
  • Lenders can recover their dues through the resolution process, freeing up capital.

Negatives:

  • A higher share of thermal power may delay India’s energy transition towards cleaner sources.
  • Stranding risks persist if advances in renewable energy and energy storage render coal assets obsolete.
  • There’s a potential danger of an asset bubble if market share loss occurs more rapidly than anticipated.

While the Power Ministry aims to balance energy security and sustainability, investors should evaluate management strategies for navigating this fine line to identify potential outperformers in the industry.

Short Term Benefits & Negatives

In the short term, the acquisition of Hiranmaye Energy presents both advantages and challenges:

Positives:

  • Improved plant load factors and cost efficiencies can be achieved through a turnaround after the takeover.
  • Better resource planning, maintenance, and regulatory compliance practices may be implemented under new ownership.

Negatives:

  • There’s a high risk of write-offs if the acquired assets cannot remain consistently viable.
  • Significant capital expenditure (capex) and operational expenditure (opex) are required post-acquisition integration.

While the consolidation of the thermal power sector appears inevitable in the near future, a prudent evaluation methodology considering long-term industry risks is crucial before making investment decisions for retail investors.

Potential Gainers and Losers from Hiranmaye Energy Acquisition

Indian Companies that will gain:

  • Adani Power Ltd (ADANIPOWER): A leading power company with strong financial performance and experience in acquisitions. Acquiring Hiranmaye’s operational units could expand their capacity and market share in Eastern India.
  • Jindal Power Ltd (JINDALPOWER): Another major power player with experience in turning around distressed assets. Taking over Hiranmaye could strengthen their footprint in West Bengal and provide access to existing power purchase agreements.
  • REC Ltd (REC): Hiranmaye’s primary lender, a successful debt resolution could lead to recovery of their ₹2,000 crore loan and boost their financial position.
  • Power Finance Corporation Ltd (PFC): Another key lender, similar to REC, successful resolution could improve their bad debt situation and enhance investor confidence.
  • Bharat Heavy Electricals Ltd (BHEL): As the plant designer and builder, BHEL might benefit from potential maintenance and upgrade contracts if Adani or Jindal acquires Hiranmaye.

Indian Companies that might lose:

  • Existing Power Producers in West Bengal: Increased competition from a well-funded Adani or Jindal could put pressure on market share and power tariffs.
  • Small Independent Power Producers: Similar to above, larger players entering the market could squeeze out smaller operators.
  • Renewable Energy Companies: Continued focus on coal-based power through this acquisition might delay India’s energy transition, potentially impacting sentiment for renewable energy players.

Global Companies:

  • Foreign Coal Suppliers: Increased demand for coal to operate Hiranmaye’s units could benefit overseas coal exporters, though long-term coal demand uncertainties persist.
  • Global Consulting Firms: The acquisition process might involve engagement of international consulting firms for due diligence and valuation, leading to potential contracts.

Global Companies that might lose:

  • Global Renewable Energy Firms: Similar to Indian renewable companies, a continued focus on coal power could deter global players from investing in India’s clean energy sector.

Market Sentiment:

The news is likely to positively impact companies like Adani, Jindal, REC, PFC, and BHEL, potentially boosting their stock prices. However, existing power producers, smaller IPPs, and renewable energy companies might face headwinds. Global coal suppliers and consulting firms could also see some gains, while global renewable energy players might be concerned about slower clean energy adoption.

Disclaimer: This information is for educational purposes only and should not be considered financial advice. Please consult with a qualified financial advisor before making any investment decisions.

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