Divestment Deal

Centre to sell stakes in NEEPCO and THDCIL

In November 2019, the Cabinet Committee on Economic Affairs (CCEA) accorded in-principle approval for strategic disinvestment in several central public sector enterprises including two power sector entities, North Eastern Electric Power Corporation Limited (NEEPCO) and THDC India Limited (THDCIL). The government will divest its shareholding of 74.23 per cent in THDCIL and 100 per cent in NEEPCO and transfer management control to power sector major NTPC Limited. The transactions will enable the government to meet its divestment target of Rs 1.05 trillion for 2019-20. As per a press release by the CCEA, “It is expected that the strategic buyer/acquirer would bring in new management/ technology/investment for the growth of these companies and may use innovative methods for their development.”

Company background

NEEPCO has been engaged in hydro and gas-based power generation in the north-eastern region since 1976. The company has an installed hydro capacity of 1,525 MW (including the 600 MW Kameng project that is ready for commissioning) and 527 MW of gas-based capacity. In addition, the company has 235 MW of hydro and 200 MW of solar capacity in the pipeline.

Meanwhile, THDCIL is a 75:25 joint venture of the central government and the Uttar Pradesh government. The company operates a hydropower capacity of 1,400 MW (the 1,000 MW Tehri HEP and the 400 MW Koteshwar HEP) in Uttarakhand. THDCIL also operates wind power plants totalling 113 MW in Gujarat. It is, moreover, developing the 1,000 MW of Tehri pumped storage project and the Khurja super thermal power project in Uttar Pradesh.

Good fit for NTPC

According to preliminary estimates, NTPC is likely to spend up to Rs 100 billion for acquiring the government’s stake in the two entities (after necessary adjustments such as debt and other charges). Analysts note that NTPC’s acquisition of the government’s stake in NEEPCO and THDCIL is likely to be a good fit since it will help the company diversify its generation portfolio, which is mostly coal based. Of NTPC’s total installed capacity of 57,356 MW, about 75 per cent is currently based on coal.

The company plans to reach a target of 130 GW by 2032 with a fuel mix of 65 per cent coal, 25 per cent renewables, 5 per cent gas and 4 per cent hydro. The acquisition of NEEPCO will also give NTPC a footing in the north-eastern region where it operates just one plant (Bongaigaon TPP in Assam) at present, while THDCIL’s acquisition will help the company to exploit synergies with its plants in the northern region. Further, NTPC has a strong balance sheet and has recorded healthy earnings over the years, thereby gaining government confidence to easily manage the acquisition. The company’s net worth has increased at a CAGR of 6.4 per cent in the past five financial years to reach Rs 1,074 billion in 2018-19. NTPC’s total income has increased at a CAGR of 5.2 per cent from Rs 753 billion in 2014-15 to Rs 922 billion in March 2019.

Meanwhile, its net profit increased at a CAGR of 3.3 per cent to reach Rs 117.5 billion during the same period. According to equity reports, the value accretion to NTPC would depend on the actual acquisition value and the progress on under-construction projects at THDCIL and NEEPCO. As per NTPC, the acquisition value will be decided after an internal assessment, which could take some time. As per news reports, an acquisition value of Rs 80 billion to Rs 100 billion is indicated, which would lead to Rs 2 billion-Rs 4 billion of accretion in NTPC’s profit after tax (see table). The return on equity may, however, witness a slight decline.

Next steps

The Department of Investment and Public Asset Management (DIPAM), the divestment department, has already started the process of appointing transaction and legal advisers for the deal, which is expected to be completed by March 2020. NTPC is likely to raise green bonds to fund the transaction. Green bonds are fixed-income securities, the proceeds of which go specifically to low-carbon climate resilient projects. Since both THDCIL and NEEPCO are predominantly involved in hydropower generation, their acquisition can be funded through green bonds. This augurs well for NTPC since it has access to low-cost debt and a firm debt-to-equity ratio (1.19 for 2018-19). While there is still time for the deal contours to be finalised, the acquisition of NEEPCO and THDCIL by NTPC is likely to yield benefits for the company as well as the shareholders in the long run.

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