IB Power

Indiabulls Power is entering the capital market on 12^th October 09, with a public issue of 33.98 crores equity shares of Rs.10 each, in the price band of Rs.40 to Rs.45 per share. There is a Green Shoe option of 5.09 crore share too.

We all know that the experience from the recent IPOs have not been very good, especially with the Power IPOs, like NHPC and Adani Power. NHPC, inspite of all hopes, is still ruling at Rs.33 as against its issue price of Rs.36 while Adani Power is just able to float, at Rs.101, as against its issue price of Rs.100. Even, Pipavav Shipyard had a disappointing listing day close, at Rs.56.80 as against its issue price of Rs.58. Though OIL India has rewarded its shareholders, but that still makes success rate of just 25%, for the primary market.

Prospective investors, therefore are posing a question whether it is worth applying for IPOs? Also, the fundamentals and valuations of this IPO will be compared with that of Adani Power, and rightly so.

Going into the details of Adani Power, the company has plans of setting up 6,600 MW Power Plants, with total equity of the company to be placed at Rs. 2,180 crores. All the projects have seen financial closure and equity tie ups, for its total capacity, which is to be made operational by March 2012, progressively in Phases, of which, one unit of 330 MW has already commenced production, while another 330 MW is due to start in this month. Even promoter's stake in the company is high at 73.50% with institutional investors having subscribed to 13.03% with public float at just 13.47%. The promoters have also expressed their execution capability in Mundra Port, as also, with commencement of one unit of its power project. Tie up for feedstock for the entire project has been in place, with financial closure having made at an optimum debt equity ratio of 70:30. Though the company has plans to increase its capacity to 9,900 MW, additional 3,300 MW capacity is likely to get executed with debt of 70% and equity contribution of 30%, to be coming from internal accruals. So, there is no fear of further equity dilution.

Now let us have a look at the project structuring and financials Indiabulls Power. Though the company is claiming to set up 5 power projects, of 1,320 MW each, aggregating to 6,600 MW, only two projects are under execution to be completed on Feb 2012 and Sept. 2012. Other 3 projects are at a quite nascent stage, as no financial tie up has been in place for these projects. So, effectively the company is 40% the size of Adani Power.

The present market capitilisation of Adani Power is at Rs.22,000 crores, and 40% of this works out at Rs.8,800 crores. With total expected number of outstanding shares of 205 crores, value per share works out to Rs. 43 per share. In view of only two projects starting that too after FY12, no internal accruals would be available with the company, to finance its future projects.

Since secondary market value per share seems to be arriving at Rs.43, it is logical to price the issue at its lower band of Rs.40 per share, where it can be seen to be fairly priced, in view of the band having announced at Rs.40-45.

Adani Power and NHPC, though listed since a month, have not been able to garner the interest of investors. This IPO will see less interest coming in from the Retail category and virtually no interest coming in from the HNI category. Also, the promoters of the company have no experience of executing mega infrastructure projects. Though the promoters of the company are engaged into realty development, but that has been a different forte altogether, in which property is largely acquired from NTC, which has been developed by a contractor, to finally sell it on ownership or lease it out.

In such a situation, subscribing to the issue beyond Rs. 40 is not advised, whereas, especially for the retail investors, it is necessary to be cautious, as generally they go for cut off. There is no such compulsion on part of the prospective investors, to go for the issue, in view of Adani Power and NHPC, now available at much better valuations, than this company.

One may try to punt on the issue for momentum play, which may also be risky. So, at Rs.40, it can be given an investment consideration, and anything beyond Rs.40 is a clear no.