Sterlite Power, the second-largest power transmission company in India, recently filed the Draft Red Herring Prospectus for an Initial Public Offering.
The company plans to raise Rs 1,250 crore by issuing new equity shares.
Sterlite Power operates in India and Brazil. According to CRISIL, it is the largest private player in power transmission with a 26 per cent market share of the transmission projects awarded through tariff-based competitive bidding (TBCB) route.
According to Brazil’s Electricity Board, Sterlite cornered 13 per cent of the projects auctioned between 2017 and 2021.
Sterlite Power is owned by the Vedanta Group that operates mining businesses all over the world. Originally, Sterlite Power was the transmission arm of Sterlite Technologies, another listed company belonging to the Vedanta Group, but was later demerged into a separate business.
The company operates two businesses: Global Infrastructure and Solutions.
Global Infrastructure: The business unit focuses on bidding, designing, building and operating transmission assets in Brazil and India. The costs are front loaded, with the company having to spend large sums on capital expenditure.
The company begins earning tariffs after the asset is connected to the grid. So far, the company has completed 10 transmission projects in India and one in Brazil. Currently, it is working on five in India and six in Brazil.
With more TBCB projects in place, the business is bound to grow in India.
The growth of large wind and solar farms can help push Sterlite’s earnings further, with more transmission assets commissioned. The company has displayed a track record of completing projects on time in the transmission segment, even completing a project in Brazil 28 months before time.
The company manages its debt by selling off its assets to investment funds like IndiGrid Invit (infrastructure investment trust), which it had launched in 2016.
Under this model, the Invit raises money through debt from financial institutions, and equity from public markets. The money is then used to buy out the assets of Sterlite Power.
It helps Sterlite reduce the debt burden on its balance sheet. Public investors get an opportunity to own operational infrastructure assets that generate strong cash flows through tariffs.
The Invit model has recently been adopted by Power Grid Corporation, the largest transmission company in India.
Solutions: The solutions business unit manufactures and supplies a wide range of products including high performance power conductors, optical ground wire and extra-high voltage cables; and the Master System Integration sub-unit, which provides bespoke solutions for the upgrade, uprate and fiberization of existing transmission infrastructure projects.
The company holds a market share of 21 per cent in power conductors in India.
The company’s revenues from operations have decreased every year from Rs. 3,555 crore in 2019 to Rs 2,092 crore in the year 2021. The decrease is partially the result of lower sales of products from its solutions business and the sale of transmission assets by the company. The company has been selling its assets off to its IndiGrid Invit and marquee investors in Brazil.
The company has managed to lower its debt from around Rs 5,830 in 2019 to around Rs 2,005 crore in 2021. The company’s net-worth was negative in 2019, which has turned positive with the sale of assets.
The company prefers selling its transmission assets as a way to monetise its earnings and grow faster, without being burdened by excessive debt.
The company has been generating negative cash flow from operations in FY19 and FY20. In FY20, the cash flows were impacted by higher inventory levels in the solutions business.
In FY19, the company had been making operational losses, leading to a negative cash flow from operations. However, the company has generated a positive cash flow from operations in FY21.
Without a consistent track record of earnings, valuing companies is often a difficult task.
The transmission space is quite competitive with well-funded and larger rivals competing with the company. In the TBCB business, the company must bid for lower tariffs in order to bag projects. In case of intense competition, the company might have to bid at unsustainable tariffs.
The company has a high debt-to-equity ratio, which is typical of a company operating in the infrastructure space. In the past, the company had to sell off its assets to lower its debt. In case the company is unable to maintain debt at sustainable levels, it is likely to continue facing financial pressure.
Cost-overruns or Delays
The company operates in a sector where it faces regulatory, geological, and other risks. In case a project is stalled, the company would have to pay expenses while being unable to monetise it. Opposition from local communities can be another issue as transmission lines often cover private properties.
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