Acquisitions are seldom fair, especially if it involves government companies. NTPC Ltd is paying ₹11,500 crore to acquire the government’s stakes in THDC India Ltd (THDCIL) and North Eastern Electric Power Corp. Ltd (Neepco).
NTPC will pay ₹7,500 crore for a 75% stake in THDCIL and ₹4,000 crore for full ownership (100%) of Neepco.
The FY19 financials of these firms peg the acquisition at a price-to-book value (P/B) of 0.9 times, higher than the 0.7 times valuation the market is currently ascribing to NTPC. “At FY19 normalized profit of THDCIL + NEEPCO we estimate company level return on equity (RoE) of 7%. Paying 0.9 times P/B for such level of RoEs may prima-facie look expensive given NTPC currently trades at a discount to these valuations despite better RoE of 10%,” said an analyst at SBICAP Securities Ltd in a note to clients.
On the positive side, with a debt-to-equity ratio of less than 1.5 times, NTPC is well placed to fund the acquisitions. They will add 2,500 megawatts (MW) of operating hydropower plants to NTPC’s predominantly thermal power portfolio, and help it diversify. Hydropower capacity will now constitute 5% of NTPC’s consolidated portfolio.
What about the impact on earnings? “Assuming the entire transaction is funded through debt (at 7.5% interest cost), it would lead to a net benefit of ₹300-400 crore (2-3% accretion to our earnings estimate). Though, we note that this takes into account successful commercialization and no under-recoveries for Kameng (power plant),” said Motilal Oswal Financial Services Ltd in a recent note.
But the acquisitions offer more. NTPC can optimize returns by lowering finance costs and sizing up the acquired firms. It can improve the acquired power plants availability factor (PAF) through better operation and maintenance (O&M) measures. This can improve efficiencies, raising plant profitability.
Besides, some other benefits can be realized through better execution. The newly acquired firms are building more than 2,000MW of power plants. A large part of them are hydropower plants. Predictably, some of them are facing execution delays.
NTPC, with its experience of implementing large projects, can fast-track execution. “The valuation on FY19 price to book value at 0.9 times looks a tad expensive,” said Edelweiss Securities Ltd in a note. “But there is great scope to soup-up earnings over the next two years by reducing PAF-based under-recoveries at NEEPCO; controlling high O&M charges and slashing them at THDCIL/NEEPCO; interest cost savings post sharing benefits; and releasing ₹1,500 crore worth of working capital.”
