Godawari Power & Ispat Ltd. integrates its source of power

Godawari Power & Ispat Ltd. (GPIL), a listed company, is going to acquire the power undertaking of its unlisted associate company, Jagdamba Power and Alloys Ltd. (JPAL). It is going to be an all stock deal. Earlier in 2018, the companies had tried to amalgamate JPAL into GPIL but the shareholders of JPAL had rejected the scheme. Now in a renewed effort, GPIL has again knocked the doors of JPAL to meet its power needs.

Godawari Power & Ispat Ltd. (GPIL), formerly Ispat Godawari Ltd (IGL), a listed company, is a flagship company of the Raipur based HIRA Group of Industries. Founded in 1999 by Mr. Bajrang Lal Agrawal, company operates in mainly two business segments of Steel and Electricity. The major driver of revenue and profit is the sale of steel and related products. Today GPIL is an end-to-end manufacturer of mild steel wires and in the process also manufactures sponge iron, billets, alloys, captive power, wires rods, steel wires, Oxygen gas, fly ash brick and iron ore pellets. It also generates power for captive consumption.

GPIL mainly functions out of 2 states: Chhattisgarh and Rajasthan. While most of its business is based in Chhattisgarh, it has one 50MW solar power plant in Rajasthan. It has 3 subsidiaries: Godawari Green Energy Ltd. (GPEL), Ardent steel Ltd. (ASL) and Godawari Energy Ltd. (GEL) None of them are wholly owned. It also has a step-down subsidiary called Hira Energy Ltd. (subsidiary of ASL). From its AR — 2019 GPIL says that only GPEL and ASL are functional while GEL’s projects never commenced and have been abandoned. Also, revenue from Hira Energy is insignificant.

Jagdamba Power and Alloys Ltd. (JPAL) is an unlisted company. It was incorporated in 1999. The company operates in 2 segments: Steel and Electricity. Over 58% of its revenue in 2018–19 came from sale of electricity, which was sold exclusively to GPIL under a short term “Power Purchase Agreement” (PPA). Besides, JPAL also manufactures HB wires (mesh wires of steel) and provides Job work services. The Power Plant became operational in FY 19 only and is a captive power supplier to GPIL.

JPAL is based in Siltara, Raipur, Chhattisgarh and it has no subsidiaries. The company is promoted by Mr. Alok Agrawal.

The Transaction

• Appointed date for the transaction is 1 April 2019.
• GPIL is going to acquire the power undertaking of JPAL in all-stock deal. The swap ratio arrived at is 140: 89 i.e. for every 140 shares held, 89 shares of GPIL will be issued.
• The Power Division of JPAL includes the Electricity and Job Work Services Business. The Non-Power division is the HB Wire Manufacturing Division.
• The scheme provides for a tentative deadline of 31st March 2021 for the scheme to take effect. Beyond this date, the scheme shall stand revoked and cancelled.

GPIL Pre and post scheme Shareholding Pattern

As can be seen, the promoter holding will be diluted by around 5%, but in the process the promoters will also get to hold shares in power business directly.

JPAL shareholding pattern (as on 31st March 2019)

The Major shareholders are Alok Agrawal (30.4%), GPIL (33.97%), Amit Agrawal (23.36%), Sagar Energy and Steels Ltd. (12.26%) and other minor shareholders (3 in number) who together hold less than 1%.

In the financials of JPAL, as well as in the copy of the Board resolution on this scheme, only Alok Agrawal is classified under “Promoter and Promoter Group”. But in the document showing Pre and Post Scheme Shareholding pattern of JPAL all shareholders except GPIL are classified under “Promoter and Promoter Group”. So more clarity is needed to determine as to who is part of the Promoter Group. Nevertheless, in the alternative, the collective promoter holding in JPAL is 66.03% as opposed to Alok Agrawal’s 30% holding.

Rationale as per the Scheme

1. With the complete integration of the Demerged Undertaking with GPIL, the captive power generation capacity of the GPIL will stand enhanced from 73MW to 98 MW. The availability of much needed additional 25MW of power capacity, to meet the shortfall of electricity, will assure uninterrupted power supply to the steel plant.
2. The Demerged Company currently has business interests in diverse businesses. Post demerger it will achieve greater management focus in other business activities.
3. The scheme will help achieve cost efficiency and help achieve economies of scale, reduction in overheads and improvement in various other operating parameters.

Valuation

So, the value of power undertaking (excluding GPIL’s share of 34%) of JPAL comes to about 10.3% of the market cap of GPIL.

Note: In the Financials released by JPAL, which show the allocation of Assets and Liabilities, they have adjusted an amount of 30 Crore by deducting it from the “Other Equity” of Non-Power division and adding it to the “Other Equity” of Power Division and named it as a transfer for “Branch/Division Account”. If we consider this naming, the transfer could either be an adjustment of the general reserve or could be recognition of an amount receivable from the Power Division, maybe a “Loan”. If it is the latter, the Fair value of Net Assets of the Power Division will be reduced to almost Nil and the whole transaction would be payment towards Goodwill and Fair value of long-term assets like Land.

What are the industry standards for valuing a Coal Power Plant?

1. In 2012, CERC came up with calculations for “benchmark capitals costs” for Coal and Thermal Power Plants. Those calculations were done for plants with capacities 500MW and above, with costs starting from Rs. 5Cr/MW and reducing as capacity increases. This scheme is of a comparatively miniscule 25MW Plant and hence the costs per MW of setting up a new plant in 2019–20 would be much higher. Besides, setting up any new coal plant has been banned in the region due to environmental restrictions. So, this acquisition would not only be beneficial valuation wise but is also necessary for GPIL.
2. Recently JSW acquired GMR Kamalanga Electricity Ltd. (GKEL) for cash consideration of Rs. 5321 Cr. Comparison of this with the GPIL-JPAL arrangement.

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