MUMBAI, May 8: ACC, the country's largest cement company, and diversified major Larsen & Toubro's engineering division are thrashing out a proposal by which L&T will produce captive power for the former.

The Rs 307.7-crore plan is unprecedented as L&T's cement division, with the second largest capacity, is battling it out in the market with ACC.

It has been proposed that L&T's group-II, the engineering, procurement and construction (EPC) division, will execute the plant on a build-own-operate (BOO) basis and will enter into a long-term power purchase agreement with ACC.

L&T is considering investing in the proposed venture through a special purpose vehicle (SPV), an investment holding company, instead of taking the investment on its own books immediately. It is believed that the return on equity in such a case has been estimated at around 31.05 per cent.

The end-user will be ACC's Wadi unit, where the company has huge expansion plans. It is understood that negotiations have been in progress this week.

"Negotiations are on with L&T, but a final agreement has not been arrived at. It will take some time," ACC sources said. They were not willing to divulge details of the proposals tabled by either ACC or L&T.

If talks materialise, it will mean that the power requirement for ACC's largest cement unit will be supplied and controlled by India's second-largest cement company. The plant will also be the first captive power unit in India to be set up on a BOO basis.

L&T is considering the special-purpose vehicle because of its long gestation period. It is not willing to take up any project which may have a negative impact on its bottomline for at least three years, particularly after a not-too-impressive 1996-97.

It is also learnt that L&T is weighing a couple of other options on how to undertake the project before deciding upon the special-purpose vehicle.

ACC's additional power requirement has risen as it intends to double capacity of the Wadi unit from two million tonnes by 1998-99 and later to six million tonnes as part of a broad plan to increase total cement capacity to 17 million tonnes by 2000.

In 1996-97, ACC produced 9.16 million tonnes of cement on an installed capacity of 10.14 million tonnes. L&T, which has a capacity of 6.15 million tonnes, produced 5.35 million tonnes in the last financial year.

However, it is not known what fuel will be used for the project. Analysts say it is unlikely that it will be coal as its supply in Karnataka is inadequate and will lead to high freight costs if transported from other states.

However, if ACC, which has been awarded a block in eastern Maharashtra, starts coal-mining operations, which it earlier said it intends to do shortly, it could enter into an arrangement with L&T for supply of coal, analysts say.

The freight cost of transferring coal from the mines to Wadi, which is close to the Maharashtra-Karnataka border, will not be significant, they said. The plant will otherwise have to use some other gas-based fuel like liquified natural gas (LNG). The government had floated a tender for a huge 2.5-million-tonne LNG terminal in Karnataka, which could become a major sourcing point for gas-based power plants in the state.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.