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Dabhol stake: Tata Power, BSES vie to survive

S Ravindran

The two domestic power biggies-Tata Power and BSES-are vying for Enron's 85 per cent stake in the Dabhol Power Company in what seems like a critical battle for survival for both.

Tata Power, it appears, has two primary reasons to gun for Dabhol Power: one, it gets a ready built plant when all its other projects are on paper; two, it also pre-empts arch rival BSES.

This is the more important issue, for if BSES gets DPC, it will stop lifting 500 mw of power from Tata Power. For the latter, this could be tragic since it cannot possibly find a buyer for the excess power in the vicinity, especially since the Maharashtra State Electricity Board says it has enough generation capacity of its own.

BSES, on the other hand, apart from dealing a severe blow to Tata Power may also be able to take a relook at several of the other contentious projects on hand.

"If BSES were to gain control of the 2,184 mw power project, it would source the required 500 mw power from this project and stop buying it from the Tatas.

Already, after BSES set up the 500 mw Dahanu power plant in Maharashtra it has been buying consistently less power from the Tatas," say independent observers in the power industry.

But a senior Tata executive defends the company's position. "Our power plants have been built through World Bank funding which has been guaranteed by the Union government. Under these circumstances, power would have to be evacuated till the loans are repaid. We have time till 2014 when our licence expires," he said.

But gaining control of DPC is hardly a simple issue. Urmik Chhaya, power analyst at Kotak Securities says: "Any company which takes over this project will have to raise huge funds. How are they going to do that? The other question is where will they sell the power and what will be the payment security mechanism? These are the fundamental questions that will have to be addressed before any take-over of the project can be contemplated."

But Chhaya points out that DPC will be crucial to Tata Power's overall gameplan. "After next year, how does Tata Power grow its power business?"

One estimate has it that anyone wanting to take over the power project will have to pay a minimum of $700 million.

"Assuming both companies bid at this reserve price even at an exchange rate of Rs 47.50 to the dollar they will have to pay Rs 33.25 billion.

"This is around 50 per cent of Tata Power's balance sheet size of Rs 64.66 billion and around 75 per cent of BSES's balance sheet size of Rs 43.27 billion. How will these two companies raise the money," says an analyst.

However, a senior BSES executive points out that the company has a low gearing with a debt-equity ratio of 0.25:1. "Raising Rs 20 billion at short notice is no problem at all. After all, what is the use of such a low debt-equity ratio otherwise," this executive asks.

Tata group sources also say that raising finance is the least of their worries.

"We are the country's largest independent power producer with an installed generation capacity of over 2,000 mw. We can always raise money on the strength of our balance sheet," say Tata group executives.

However, a change in management control at DPC will have to be accompanied by a series of legislative changes.

First, if the new owner is not allowed to sell power outside Maharashtra, the project is unlikely to make any sense for the buyer. Particularly, as the state government has made it clear that it can absorb only 740 mw of the proposed 2,184 mw installed capacity.

This will mean giving the Dabhol project a mega-power status. This is far from easy, as this will need an amendment by the Parliament, as the project was not set up through the competitive bidding route but through a memorandum of understanding.

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