The Hindu Business Line : Low valuation may dash State power units' IPO plans

Absence of firm agreements also implies that the EPS mentioned is only notional, given the large overdue position of the bulk buyers to the generating companies.

Bangalore , Oct. 26

STATE Governments' hopes of tapping the equity market for their unbundled power utilities have been forestalled by the phenomenal success of the recent NTPC IPO.

At least three State utilities had been examining the possibility of tapping the IPO markets to raise equity funds for their respective generation entities.

Among the companies that had examined the possibility of divestment are Karnataka Power Corporation (KPC) and Andhra Pradesh Generation Company.

This was part of the World Bank's prescription for restructuring the power sector in these two States.

Sources said that few State Governments would be in a position to realise revenues through divestment or dilution of their respective stakes in power entities.

One of the major reasons of the bleak outlook is the low valuation of State-owned entities, partly on account of the high investment risks associated with them.

The primary reason is that unlike CPGUs, which have multiple buyers, these companies are single customer dependent.

This would imply that the price realisation would be pegged considerably lower than the NTPC offering, which was based on an earnings per share (EPS) of Rs 5.10 and an industry earnings discounting of 12.3 times.

With an EPS equivalent to Rs 4 per share, Karnataka Power Corporation would be in a position to match the price and based on the same PE, it would in a position to command a premium of around Rs 45 per share.

But there are other technical factors that decide the price, including the security of revenue flows, the sources said.

The revenues of Central power generating companies (CPGCs), including NTPC, Neyveli Lignite Corporation and National Hydroelectric Power Corporation, are fully secured under the tripartite arrangement effective from fiscal 2003.

This arrangement provides for recourse to Central transfers to States in the event of defaults, along with a penal interest of 15 per cent per annum beyond 60 days from the date of billing. The arrangement has cut out the risk of payment defaults.

None of the unbundled State utilities have such watertight payment security arrangements with the Governments or with the transmission companies, the sources said.

The only line of security with some unbundled entities are letters of credit and guarantees by respective State Governments.

These guarantees have been provided only in the case of projects where the debt financing is provided through commercial funding instead of Budgetary funding.

Absence of firm agreements also implies that the EPS mentioned is only notional, given the large overdue position of the bulk buyers to the generating companies.

Besides, the tripartite arrangement also implies that the States would be obliged to settle the Central dues first.

State Government owned generating companies would only have residual charge on the revenues of the bulk power buyers, unless the receivables of the transmission and distribution companies themselves improve.

The bills realised by the transmission and distribution companies, even in States that have begun the process of reforms, is currently only about 55 per cent.

This means that the utilities are unable to realise the bills for 45 per cent of the power sold.