Adani, Tata, Torrent, five others eye 51% stake in two UP discoms

Sterlite Power Ltd’s Serentica Renewables, Torrent Power Ltd, ReNew Energy Global Plc, RP-Sanjiv Goenka Group’s CESC Ltd, and a GMR and Électricité de France (EDF) consortium are also interested in acquiring UP government’s 51% stake each in Purvanchal Vidyut Vitran Nigam Ltd (PUVVNL) and Dakshinanchal Vidyut Vitran Nigam Ltd (DVVNL), the people said on the condition of anonymity.

The request for proposal (RFP), a formal document to solicit bids, is likely to be floated by July.

“Given that such a large discom opportunity is coming up for consideration, there is a significant interest in the transaction," the first person. "The expectation is that the transaction for both the discoms would be completed by Deepawali this year."

Grant Thornton Bharat LLP is running the transaction for the majority stake sale in the two distribution companies (discoms) with a combined annual revenue of around ₹50,000 crore. 

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UP’s bid to sell a controlling stake in the two discoms marks a renewed effort by states to privatize unprofitable utilities after the central government started the process to divest majority shareholding in such distribution companies in Union territories. India’s 67 power distributors have been struggling with prolonged aggregate transmission and commercial losses, which rose from 15.37% in FY23 to 16.87% in FY24. However, private discoms reduced their AT&C losses from 17.17% to 12.12% during the period.

According to government data, PUVVNL and DVVNL, along with 11 other utilities, saw an improvement of over 5% in their AT&C losses in FY24.

Realistic targets

It may be the largest discom privatization in the country in terms of size, revenues and complexity, and the success will be determined by the tariff and efficiency curve provided to the bidders and how the baselines are set, said Sambitosh Mohapatra, partner and leader, climate and energy, PwC India. 

“Realistic targets for AT&C (aggregate technical and commercial) losses should be set and the regulatory framework should allow for the recovery of losses in the initial years over a time period," Mohapatra said. “Investors would want a gradient allowing time to invest, improve customer services and recoup the AT&C losses." 

In February, the UP government allowed the Uttar Pradesh Power Corp (UPPCL), which operates the state's government-owned discoms, to sell 51% in DVVNL and PUVVNL, while retaining the remaining 49%. In March, the corporation selected Grant Thornton Bharat as the adviser for the privatization process.

Other discoms under the state-run corporation include Kanpur Electricity Supply Co., Madhyanchal Vidyut Vitaran Nigam Ltd and Pashchimanchal Vidyut Vitran Nigam Ltd. 

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“The first benefit privatization is usually expected to bring in is improvement in operating efficiency, mainly through lower AT&C losses, which has been witnessed in previous instances in Odisha and Delhi," said Vikram V., vice president & co-group head-corporate ratings, Icra Ltd. “A trajectory for reduction of these losses is a key condition to be met by the winning bidders post privatization, in turn, improving the operating performance and the financial position."

A spokesperson for Adani Group confirmed that the Ahmedabad-headquartered conglomerate would be bidding for the majority stake in the discoms. 

A Serentica Renewables spokesperson said the company continues to “explore potential partnerships and acquisition opportunities on an ongoing basis" but does not "comment on specific plans" as a policy.

Tata Power declined to comment. RP-Sanjiv Goenka Group, GMR-EDF, ReNew, Greenko and Torrent did not respond to the queries till press time. Queries sent to the UPPCL chairman and managing director and Grant Thornton Bharat also remained unanswered.

Odisha model

In 2020, Centre decided to privatize all electricity distribution companies in the union territories administered directly by it. The CESC won control of the Chandigarh discom, while Torrent Power took control of the Dadra and Nagar Haveli one. The sales were linked to incentives from the Centre, encouraging discoms to seek new investors. In May 2020, the government also announced a reform-linked ₹90,000 crore liquidity injection into fund-starved discoms as part of a ₹20 trillion stimulus package to revive the economy.

The push to sell control of public sector discoms and operate them in a public-private partnership mirrors the government’s effort to monetize power utilities and generate value through stake sales or initial public offerings (IPO). India has about 67 discoms, including 16 run by the private sector in Delhi, Mumbai, Odisha, West Bengal, Gujarat and Dadra and Nagar Haveli. The nation’s top private discoms include Tata Power, Adani Group, CESC and Torrent Power.

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Odisha was the first state to privatize its power distribution sector into four discoms in 1999. This was followed by Delhi, which privatized three of its discoms in July 2002: BSES Rajdhani Power Ltd, BSES Yamuna Power Ltd and Tata Power Delhi Distribution Ltd.

"If (UP discom process is) structured well, losses incurred during the initial 2-3 years can be recouped within the next 3-4 year period," said Mohapatra. “So certainty is needed over a 10-year period. In the discom privatization in Odisha, bidding framework and regulatory support resulted in all four discoms able to operate profitably within 2-3 years."