In a deal which has several similarities to Jojobera, Tata Electric Company (TEC) is all set to acquire five of ACC's captive units of total capacity 125mw. According to ACC offcials, TEC will run the plants more efficiently.

But the logic of the transfer of the plants is a bit difficult to understand, since ACC is setting up DG sets (2X25mw at Kymore and Jamul) to lower its reliance on the grid. If acquired by TEC, the units will have the status of IPPs, and power will be priced according to the two-part pricing formula to earn at least the minimum guaranteed return on normative PLF.

At present, the ACC captive plants are operating at a PLF of below 40 per cent. If ACC is not able to operate the plants at the desired PLF, the better option than to hive off is to give a management, operation and maintenance contract to TEC. Unless ACC is cash-strapped, giving an operation and maintenance contract to TEC makes more sense, since the price of power charged by TEC will be quite high in viewof the two-part formula. In 1997-98, however, 63 per cent of the power consumed by ACC was paid for at the rate of Rs 2.87 per unit.

The proposed sale, if at all, becomes all the more hard to understand because ACC is setting up a two-million tonne cement plant at Wadi, Karnataka. Considering that capacity is being expanded, why should the company be willing to sell of its captive-power unit in the state? ACC's cash flow may not be the best ever, but the company is hardly that desperate for cash that it has to sell its captive units.

The price for the proposed sale cannot be as high as the price paid for the Jojobera unit (Rs 4.44 crore/mw), as the Jojobera unit was sold with infrastructure including land, and the greenfield unit can be set up at a lower capital cost per unit.

Assuming a capital cost of Rs 3.5 crore/mw, the consideration for ACC would work out to around Rs 438 crore. Generating cash is no problem for TEC, as it is cash-rich. Though capacity addition for TEC is marginal, as it alreadyhas installed capacity of 1,841mw, going for the IPP route to grow is probably the only option available to TEC. Taking a conservative estimate that TEC will finance the acquisition by opting for a 1:1 debt:equity ratio, at normative PLF, the contribution to the bottomline of TEC should be significant at Rs 35 crore. Considering its financial strength, TEC will rely more on internal accruals. This is because internal accrual is included in equity to calculate assured post-tax returns. This should be reflected in the price of TEC. For 1997-98, TEC posted a PAT of Rs 320.66 crore, and a clear profit of Rs 286.5 crore. Since statutory and special appropriations are not required to be made for IPP, it is safe to assume that profit of IPP accounted for at least 6 per cent of the clear profit of TEC.

However, the hitch to the IPP route is the same as that for licensee. The profit will be flat as soon as the PLF stabilises, and the PLF can't keep on improving, except marginally, every year. It is safe to assumethat at least 20 per cent of the distributable profit of TEC for the next couple of years will come from IPPs. But after that, it will be back to square one, unless they get the Bandra-Kurla complex as its license area.

JK Corp

Restructuring in the PSF/PFY industry is inevitable, considering that barring a couple of players, everyone is saddled with unviable small capacities. All the small players have exhausted their working-capital credit limits, and have an unfavorable debt-equity structure. Small capacities face the disadvantage of economics of scale, and the downtrend in prices have already resulted in closure of many units. Orkay, Indian Organics, Borada Rayon JK, JCT, etc, have all been scouting about for buyers or people who would invest money in the venture.

The latest proposals submitted to institutions is from JK Corp, which has submitted a plan for raising Rs 175-200 crore from the polyester business. JK Corp claims that venturing out of the PSF/PFY business would help the cash flow,aid the company in tiding over the financial mess and help concentrating on cement and paper.

Although the idea makes sense, plants with small capacities, like Orkay's, Indian Organics' and JCT's, are finding it very difficult to find a partner to pump in money or take over the business. With Polysindo defaulting on its debt payments, it was clear that JCT would have to find some other partner. Further, after Reliance took over India Polyfils, it has set up a base in the north and the east. So for the JK group, it would be quite a task to convince buyers for its polyester plants. The proposal to raise Rs 175 crore from the sale of its PSF and PFY units, which have a capacity of only 30,000 tpa, far less than the minimum economic size of 1,50,000 tpa, is optimistic.

So the scope for optimism in the near future depends on the ability of the company to convince financial institutions to reschedule their loan and subscribe to their proposed Rs 257-crore NCD paper, having an yield of 15.5 percent.

Whetherthe institutions agree or not, one thing is clear, the restructuring of the industry drains the profitability of the institutions.

(With contributions from Urmik Chhaya and Manish Saxena)