Reliance Power’s proposed acquisition of Jaiprakash Power Ventures’ (JP Ventures) entire portfolio of operational hydro power projects generating 1,791 MW of power is a deal that can add value to the former and deprive the JP group of cash-generating assets.

Deleveraging parent

If it goes through, the deal which values JP Ventures’ power assets at over ₹10,000 crore, will speed up the deleveraging of parent JP Associates’ consolidated balance sheet (₹61,101 crore debt as on March 31). JP Associates had earlier sold its cement division to UltraTech Cement at a value of over ₹3,800 crore.

Earlier this month it also raised about ₹1,499 crore through the qualified institutional placement route. The company which had a debt-to-equity ratio of close to six times as on March 31, may be able to lighten the debt and reduce the ratio to five times, still much higher than the comfort level of two times.

However, this deal will also deprive JP Ventures of a sizable portion of its current revenues and cash flows. The deal may comprise three hydro power projects which generated revenues of about ₹1,900 crore out of the company’s total revenues of ₹2,459 crore in 2012-13.

After the asset sale, JP Ventures will be left with operating coal-based capacity of 500 MW until it commissions the first 600 MW of its Nigrie Super Thermal Power Project (1,320 MW) by August.

For Reliance Power (RPower), this appears to be a sweet deal. At the reported deal value of over ₹10,000 crore, the company will be able to acquire already operational hydro power plants at a reasonable valuation. While this deal values the hydro power assets at about ₹5.6 crore/MW, market valuations for peers such as NHPC suggest that the going rate is about ₹6.3 crore/MW.

RPower currently operates a coal-based power generation capacity of 4,440 MW. It does not have any operational hydro power capacity.

All of its twelve hydro power plants (5,292 MW capacity) are currently under development.

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