Adani Power Ltd, the country’s largest private sector Thermal Power producer approves slump sale of Mundra power business to its subsidiary with Appointed Date being 31st March 2017.

Adani Power Ltd is a part of the Adani Group. The Company is engaged in providing electric power generation by coal-based thermal power plants and coal trading. Its business activity is undertaken at Mundra Thermal Power Plant of the Company in Gujarat and Thermal Power Plant of its subsidiaries at Tiroda (Maharashtra), at Kawai (Rajasthan) and at Udupi (Karnataka). It has approximately five power projects. The Company operates an aggregate of approximately 10,480 megawatts generation capacity comprising of over 4,620 megawatts at Mundra; approximately 3,300 megawatts at Tiroda; over 1,320 megawatts at Kawai; approximately 1,200 megawatts at Udupi, and over 40 megawatts (solar) at Kutch, Gujarat. It focuses to sell the power generated from these projects under a combination of long term Power Purchase Agreements and on merchant basis. Its subsidiaries include Adani Power Maharashtra Limited, Adani Power Rajasthan Limited, Udupi Power Corporation Limited, Adani Power Resources Limited and Adani Power (Jharkhand) Ltd. The Company enjoys a market cap of Rs 10,549 Crores.

Transaction

Adani-Power-Financial-Revival-Internal-Restructuring-1

Note: The proposed transfer is an internal transfer to the subsidiary of Adani Power Ltd only. The final shareholders being remaining the same, there is no loss of economic interest to any of the shareholders.

Valuation

Particulars Amount
Enterprise Value of the demerged business 22,475
Less: Debt -21,772
Less: Debt like Items -935
Add: Cash and Cash equivalents 338
Total 106

Revenue from operations reported on standalone basis for the year ended 31st March 2017 is totalling to Rs 11,018 Crores.  So enterprise value is about 2x revenues FY 2017.Interest Cost for FY 2017 is Rs 3,102 Crores, which means Interest cost percentage on Debt mentioned under this valuation will be 14% (Interest/Debt).

Slump Sale or Slump Exchange?

The transaction is done on Slump Exchange basis, wherein Adani Power (Mundra) Ltd, will issue 10,60,00,000 Equity shares of Rs 10/- each to Adani Power Ltd on transfer of the Mundra Unit without any values being assigned to the individual assets and liabilities. This transfer does not envisage a cash consideration and the company does not plan to list the resulting separate entity.Recently the Bombay High Court (High Court) in the case of Bharat Bijlee Limited had an occasion to reconsider the issue of taxability on slump sale exchange and held the same to be not taxable under the provisions of Section 50B of the Income Tax Act 1961.Hence the slump exchange will not result in any tax liability to Adani Power Ltd.

Market Capitalization

Particulars Pre Arrangement (31st March 2017) Post Arrangement (22-06-2017)
Number of Shares 386 386
Market Price per share 40 27
Market Cap 15,408 10,529

Reason for hiving off the Mundra Plant

  1. The Hon’ble Supreme Court judgement dated April 11, 2017, did not grant relief to the company for increase in coal cost due to change in Indonesian regulations. The decision was spurred by the unviability of running its power plant at Mundra on imported coal. This resulted in reversal of revenue in the nature of Compensatory Tariff of Rs 3,620 Crores recognized up to 31st March 2016 in case of the Company, pursuant to the order of Hon’ble Supreme Court dated 11th April 2017.
  2. The Mundra plant inspite of having revenue of Rs 11,018 Crores is presently incurring loss before taxes to the tune of Rs 2,230 Crores on (Ref: Standalone Q4 results) this is since the PPA (Power Purchase Agreement) did not fully compensate the current costs of producing electricity some of which includes fuel costs amounting to Rs 7,191 Crores which comprises 51 % of total expenses. Kindly Refer the table below:
    Table 1: Standalone Financials (All Fig. in Rs. Crores)

    Particulars 2017 2016
    Revenue from operations 11,018 12,875
    Other Income 735 523
    Total Income 11,753 13,398
    EBITDA 1,993 4,049
    EBITDA Margin 18% 31%
    Depreciation 1,121 1,137
    EBIT 872 2,912
    EBIT Margin 8% 23%
    Interest Cost 3,102 2,951
    Profit/Loss from operations before exceptional items -2,229 -39
    Exceptional Items -3,908 0
    Profit/Loss from Before Tax -6137 -39

    Table 2: Breakup of Exceptional Items

    Details Amount (Rs in Crores)
    Reversal of revenue in the nature of Compensatory Tariff, recognized up to 31st March 2016 in case of the Company, pursuant to the order of Hon’ble Supreme Court dated 11th April 2017. 3,620
    Write off of advances given to Brakel Kinnaur Power Private Limited, by the Company due to delay in initiation of underlying project for which the said advance was given. 288
    Total 3,908
  3. In May 2017, of 2,000 MW power provided by Adani Power Ltd to Gujarat Urja Vikas Nigam Ltd (GUVNL) under different PPAs, 1,250 MW power supply has been discontinued by APL Adani Power Limited(APL) in a phased manner, since the last week of April.
  4. Consequent to the outcome of the Hon’ble Supreme Court judgement, the company has engaged with stakeholders, including GUVNL, for possible remedial measures for long term sustainability of the Mundra Plant.
  5. To add up to the woes, the Company’s debt on the consolidated level is totalling to Rs 52,500 Crores. The breakup of the same is, Adani Power Ltd Rs 24,700 Crores, Adani Power Mundra Ltd Rs 12,400 Crores, Adani Power Rajasthan Limited Rs 5,775 Crores, Udupi Power Corporation Ltd Rs 3,660 Crores, and working capital debt Rs 6,000 Crores.

Rationale for Restructuring

As per the scheme,

  1. Adani Power Ltd was originally envisaged as to be power generating company. However, with the growth opportunities in the form of new power projects as well as acquisitions, it no longer retains the original nature. The characteristics of risk, growth, funding requirements and cash flows involved with the Company’s distinct activities, i.e. investments and power generation are quite distinct.
  2. The Scheme will enable the company to focus on separate businesses and will allow induction of capital/strategic investor into the Mundra Power Generating business.

 Over and above the rationale mentioned in the scheme, it seems the company wants to achieve following:

  • As per the Scheme, Appointed Date is taken as 31st March 2017, Adani Power Limited’s balance sheet as on 31st March 2017 will not include assets and liabilities relating to Mudra Plant, even future losses will be transferred to the Transferee company. So, the Balance Sheet on Standalone basis will not reflect losses in the subsidiary and but at the same time it will capture present value of business at Rs 106 crores
  • As per Sec 2(19AA) read with sub section (5) of section 72A all the conditions of demerger are satisfied by both the companies under this Scheme and hence all the accumulated losses and unabsorbed depreciation related to Mundra plant shall be allowed to be carried forward and set off in the hands of the transferee company.

Accounting Treatment

  • The Transferor Company shall de-recognize from its books, the book value of assets, liabilities and reserves and surplus pertaining to the Mundra Power Generating undertaking, transferred to the Transferee Company including rights, interests, obligations of the Transferor Company in such assets, liabilities and reserves and surplus under the scheme.
  • Th Transferee Company shall account for the transfer and vesting of the Mundra Power Generating Undertaking in its books of accounts as per “Pooling of Interest Method” prescribed under Indian Accounting Standard 103- “Business Combinations” notified under Section 133 of the Companies Act 2013 read with relevant rules issued thereunder and other applicable accounting standard prescribed under the Act.
  • It may be noted that in case of both Transferor and Transferee companies, the difference between the consideration payable by the Transferee Company and net assets transferred to the Transferee Company shall be adjusted in the capital reserve in the books of both Transferor Company and Transferee Company respectively. Though the losses incurred are Revenue losses.

Conclusion

The management of Adani Power Ltd, through the scheme, wants to adjust the losses of the undertaking against capital reserve and balance sheet of Adani power with better debt equity ratio. In the process, it is creating the structure to invite strategic partner which may be the government entity, which is the sole/main customer. No doubt it looks like in the long run the power plant can be run only with government supports and subsidies directly or indirectly. In a similar case, Tata power is trying to sell the said plant at only Rupee 1 where, here the company can value the undertaking at Rs 106 crores.

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  • Hi, I have two questions:
    1. How such transaction helps adjusting against capital reserve of Adani Power Limited and what are the advantages of that? How it helps Adani Power in managing its debt to Equity Ratio?
    2. How will you justify the market price per share post arrangement of Rs 27?

    • a1. The demerged undertaking is incurring revenue losses for the year ended 31 st March 2017. The difference of net proceedings from the transaction is directly recorded in capital reserve account without taking any impact in P&L. Advantage being that such revenue losses instead of getting hit to Free Reserves are being adjusted against Capital Reserves. There is no change in Equity, whereas the debt pertaining to demerger business is taken out of the balance sheet which will reduce the debt equity ratio.

      a2. The market share price Rs 27 is taken from BSE on post announcement date i.e. 22 nd June 2017. This is done just to show position of the market cap, post announcement to reflect the sentiments of the investors.