Management discussed the Avantha Power acquisition with analysts, presenting data points on its power projects that suggest valuation is reasonable. However, we are disappointed with the use of CG’s cash flows to fund a non-core promoter-owned business, as well as absence of early disclosure of the transaction.
Poor Corporate Governance: In the past, management had consistently denied any desire to fund Avantha. The communication on the agenda for the board meeting on March 24th was restricted to the buyback. Had the intention to buy a stake in Avantha been disclosed then, the stock may not have risen 13% in a week. CG’s investment of Rs2.27B is below the threshold that requires shareholder approval – a process that might expose the deal to closer scrutiny; noncore foray for a T&D major, in our view.
Management has emphasized that the investment is at book value of Rs11 per share. For a capacity of 165MW, we would attribute
(165MW*Rs40mn/MW*30% equity) or Rs2B, which is the cost of setting up new capacities. The valuation of Rs5.5B for the deal implies that CG has paid a premium for the 600MW Korba project, which, as per management, is in an advanced stage of commencement of construction