Players from various sectors are looking at entering the power segment, expecting huge returns from an electricity-starved economy
Since 2009, the power sector has seen the entry of players from diverse sectors ranging from auto-makers to real-estate players. Experts say that expected high returns are the key driver for this growing interest. However, coal issues, lack of managerial expertise and merchant power tariffs are key risks to watch out for.
Among the recent major announcements of forays into the power sector were by Shree Cement Ltd, Emami Ltd, Sundaram Clayton Ltd, Madhucon Projects Ltd (MPL), Era Infra Engineering Ltd, SKIL Infrastructure, Adhunik Metaliks, Singareni Collieries Company Ltd and the latest is by the Hiranandani Group.
“One of the main reasons to get into the power sector is that some of these companies saw a major downturn in the segment they were operating, for example real estate. Infrastructure projects, though capital intensive, provide a steady cash flow after the construction phase,” said Chaula Desai, associate director, Ernst &Young. She has been advising a couple of companies in their power-venture plans.
Ms Desai also pointed out that power portfolios have helped in attracting more investor interest. “Some of the companies or groups that have had power in their portfolios and who have listed these entities have done pretty well. This has been the driving force,” she added.
Apart from the high returns of a minimum of 18% that they are looking at, such ventures also allow players from diverse sectors to sell their projects or licenses at higher valuations later.
Last year, transformer maker Emco Ltd sold its subsidiary, Emco Energy Ltd, to the GMR Group. Emco was in the process of developing a 600-MW power project.
“They can get a return of around 20% to 30% on the cost, which is a good one,” said Amit Srivastava, research analyst, Karvy Stock Broking Ltd.
“Even if they are selling it (the project) at a later stage, they are getting good attractive valuations if the project is ready. However, there could be huge gains if they consolidate and list a larger capacity (power company),” said Ms Desai.
Venturing into the power sector is a natural expansion plan for companies like Era Infra and SKIL Infrastructure, who belong to the infrastructure segment. It also makes sense in terms of backward or forward integration for companies like Singareni Collieries Company Ltd (SCCL) and Adhunik Metaliks who are in the mining business. However, the power sector is completely new terrain for auto, real estate and FMCG companies like Emami, Hiranandani Group and Sundaram Clayton.
What would be important from an investor’s perspective? “If we were to analyse this from an investor’s perspective, we may not go for the new players due to their lack of expertise. Issues like whether they would be able to execute the project or if they will eventually sell the license to another player are also factors to be taken into consideration. Coal supply is another risk involved. Coal imports may not solve the issue as India lacks the port capacity required to manage its coal requirements,” said Mr Srivastava.
“Building a team to execute these projects would be the key challenge. The other option is to outsource through turnkey projects,” said Ms Desai. However, in terms of turnkey projects, the margins are impacted by 15% to 20%, which makes a huge difference to the bottom-line.
Further, the periodic fall and rise in merchant power tariffs is also a concern these companies may face. A number of them plan to sell the power generated in the open market, including companies like Shree Cement and SCCL.
“Long-term fluctuation in the merchant power segment is a risk that these players will be facing. However, they are content with the fact that even if the tariffs were to fall, the returns would still be decent at 15% to 18%,” said Mr Srivastava. However, Ms Desai shares a positive outlook on the merchant power risk. “The merchant power market is here to stay. They are looking at margins of 30% to 35% (in certain cases), which is quite attractive for these companies,” said Ms Desai.
Besides MAT, the revised draft will also address other issues such as tax exemption for the housing sector and taxation of savings
The government today said that the revised draft of the Direct Taxes Code (DTC), aimed at simplifying the tax structure, would be released for public debate in one-two months, reports PTI
"The revised draft will be ready within a month or two," Central Board of Direct Taxes (CBDT) chairman SSN Moorthy said on the sidelines of an Assocham seminar.
In August last year, the government had released the draft DTC, which is being revised on the basis of inputs received from various stakeholders.
The DTC is slated to be introduced in April next year and will ultimately replace the Income Tax Act, 1961, bringing all other direct taxes, including wealth tax, under its purview.
Finance minister Pranab Mukherjee had said that if a reasonable level of discussion happens on the code, a bill could be placed in the winter session of Parliament.
However, the industry is not happy with some aspects of the draft DTC, especially the modified provision of the Minimum Alternate Tax (MAT), the amount that companies are mandatorily required to pay as tax.
The draft suggested 2% MAT on the gross asset value of a company, instead of the current levy of 15% on book profits.
Replying to a query whether the MAT issue will be addressed by the government, Moorthy said, "I won't commit on anything. All I can say is, all the issues raised by the industry and other representatives are under consideration and we are modifying the DTC."
Besides MAT, the revised draft will also address other issues such as tax exemption for the housing sector and taxation of savings.
Expect no significant move from the bourses on either side
The market was volatile today, after it factored in the eurozone aid program. The Sensex ended at 17,195, higher by 54 points (0.3%) while the Nifty settled at 5,156, up 20 points (0.4%). The bourses started with a gain, taking cues from Asian markets. However, they soon pared their gains and touched their intraday lows at the mid-morning session. There was a sharp recovery in afternoon trade, supported by realty and banking stocks.
Asian stocks were volatile after a firm start on concerns about the global economy's outlook despite the massive rescue package for the European debt crisis. Key benchmark indices in Japan, Taiwan and South Korea fell by 0.08% to 0.43%. On the other hand, indices in China, Indonesia, Hong Kong and Singapore rose by 0.31% to 1.13%.
US stocks were down on Tuesday on worries that the $1-trillion bailout for Europe won't solve the region's deep-seated problems. The Dow was down 37 points, (0.34%) to 10,748. The S&P 500 was down 4 points (0.34%) to 1,156 and the Nasdaq gained 0.64 points (0.03%) to 2,375.
There are concerns over the trillion dollar package to pull the eurozone out of the debt crisis. The emergency package announced on Monday offers loans and loan guarantees, if necessary, to help countries to service their debt. The European Central Bank’s (ECB) promise to buy government bonds will help support investor demand. However, the package is not directed to stimulate growth in the weak European economy.
Closer home, gold was trading at near record high levels on Wednesday afternoon tracking overseas gains. Traders were unwilling to buy at this high level. International gold was trading at $1,228.55/1,299.55 an ounce as against the previous close of $1,232.05/1,233.05, after hitting an all-time high of $1,233.65 in the last session.
Industrial output grew slower than expected at 13.5% in March from the year-ago period. The slow growth is because of the partial withdrawal of stimulus measures and increase in interest rates. The Planning Commission, however, believes that the slowdown in March industrial output will not affect the gross domestic product (GDP) of FY 2009-10.
The Reserve Bank of India (RBI) said that the capital account will be opened up gradually and there is no plan of imposing a Tobin Tax to curb currency speculation. The Tobin Tax is a transaction tax on currency conversions intended to curb volatility and speculation. The capital account convertibility is integrally attached with the broader goal of economic growth. However, the RBI also expressed its preference for long-term equity flows over short-term debt flows.
The agriculture minister has said that the government must protect its farmers from cheap imports of wheat and sugar. India abolished a 60% import tax on the sweetener in April 2009. The country, the second-biggest producer of wheat, allowed tax-free imports of the grain in early 2007.
Finance minister Pranab Mukherjee said that although there is concern over high inflation, it seems to be easing now. Wholesale price inflation touched a 17-month high of 9.9% in March.
Foreign Institutional Investors (FIIs) were net buyers yesterday of Rs20 crore. Domestic Institutional Investors (DIIs) also bought stocks worth Rs22 crore. The rupee was up, taking a cue from the strong equity market.
L&T (up 1.2%) has received a project from the Qatari government for waste water treatment. Cadila Healthcare (up 2.5%) has entered into a licensing and supply agreement with Abbott Laboratories that will help Abbott quicken the pace of its growth in emerging markets. As per the agreement, Abbott will gain the rights to at least 24 Zydus products in 15 emerging markets where Abbott has a strong and growing presence. The agreement also has an option for additional 40 products to be included over the term of the collaboration.