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The Indian power sector, charged up with increased merger and acquisition activity recently, is poised for more such deals, as lenders nudge beleaguered local developers to lower valuation expectations of their projects to attract foreign investment.

In the last three months, foreign companies have committed investments of around $2 billion, or about INR  12,200 crore, into hydro and thermal power plants in the country. Industry observers say foreign investors are keen to pick up more projects as the M&A route gives them easy entry into the sector and valuations are attractive because most developers are caught between huge debt and poor cash flow. But they are being choosy.

"Foreign investors have limited interest mainly in operational projects. They are not interested in taking over execution risk," said Salil Garg, director-corporate ratings at New Delhi-based credit rating agency India Ratings & Research. "A lot of companies entered the power sector when the going was good; now they are trapped. Not all of them will find buyers," he said.

Gerald Mestrallet, chairman and CEO at GDF Suez, recently that the French electricity utility company decided to buy 74 Percent stake in Hyderabad-based Meenakshi Energy after evaluating 200 companies. Abu Dhabi National Energy Company's global power head Frank Perez too had said that he looked at 100 proposals from India before picking up stake in Jaiprakash Power Venture's hydropower projects. Riding on the power boom 5-10 years back, several power companies had embarked on aggressive expansion plans while many other companies diversified into the sector, lured by the demand potential.

But a change in economic environment and a host of issues inherent to the sector - ranging from environment clearance and land acquisition to fuel availability and weak financial health of state electricity boards - have left these companies with huge debt and muted cash flows.

"Some of the Indian developers are selling their assets as the bleeding on their balance sheets for last three years has impacted their equity infusion capability for other projects and thus their objective is to raise money and continue with other projects," said Ashok Khurana, director general of Association of Power Producers.
Power companies, from small independent power producers to infrastructure conglomerates such as Lanco, GMR, and GVK, are now seeking equity investment. And many investors are on the prowl for quality assets at cheap valuations.

Source-On Request