Indiabulls Power IPO Analysis

Will be without power for many years

First unit to go on stream only by June 2012

India Bulls Power (IBPL), a subsidiary of India Bulls Real Estate, was established to develop, construct and operate power projects either on its own or through various subsidiaries. Post the initial public offer (IPO), Indiabulls Real Estate (IBEL) will hold 57.81% of the equity of the company.

Currently, IBPL has five thermal power projects, with an aggregate installed capacity of 6,615 MW under development. The estimated cost of projects under development is Rs 31052.40 crore. While the Phase I and Phase II of the Amravati power project will be developed directly by the company, the Bhaiyathan Power Project, Nashik Power Project and Chhattisgarh Power Project will be developed through wholly owned subsidiaries of the company, i.e., Indiabulls CSEB Bhaiyathan Power (ICBPL), Indiabulls Realtech (IRL), and Indiabulls Powergen (IPGen). These five power projects will be commissioned between June 2012 and September 2013.

Apart from the above five thermal power plants, IBPL has signed memoranda of understanding (MoUs) for developing four medium-size run-of-the-river hydro-power projects, aggregating 167 MW, in Arunachal Pradesh and for two thermal power plants, with an aggregate capacity of 3,960 MW, in Jharkhand and Madhya Pradesh (MP).

The hydropower projects, whose capacity ranges from 30 MW-60 MW, are to be executed under build-own-operate-and-transfer basis for a lease of 40 years. They are to be located on various tributaries of the Kameng River in the East Kameng district of Arunachal Pradesh. IBPL has already signed MoU with the government of Arunachal Pradesh. As per the MoU, the project will revert back to the Arunachal government on expiry of the lease period of 40 years. For projects in Jharkhand and MP, the company is evaluating establishment of thermal power plants, one, with a capacity of 1,320 MW, in Jharkhand and another, with a 2,640-MW capacity, in Chhindwara, MP.

IBPL has received coal linkages for the Amravati Phase I Power Project and has been allocated captive coal mines for its Bhaiyathan Power Project. While the company has received coal linkage for the Nashik Power Project, the reconfiguration of the project into 1,335 MW, instead of the previously planned 1,320 MW, will necessitate additional approval for coal to meet the enhanced capacity.

IBPL has entered into a power-purchase agreement (PPA) with the Chhattisgarh State Electricity Board (CSEB) for sale of 858-MW power out of the 1,320 MW proposed to be generated at the Bhaiyathan Power Project. For the Amravati Phase I Power Project, the company has entered into a PPA with Tata Power Trading Company, for sale of up to 1,000 MW of power, on 5 June 2009. According to the Tata Power PPA, the company will independently participate in all competitive bidding processes for selling power on a long-term basis. The quantum of power tied on its own will be deducted from the contracted capacity, subject to deduction not exceeding 700 MW. IBPL may withhold 700 MW out of 1,000 MW at its discretion. Subsequently, the company also entered into a MOU with Maharashtra State Electricity Distribution Company (MSEDCL) for sale of up to 1,000 MW of power out of the 1,320 MW proposed to be generated at the Amravati Phase I Power Project. It is yet to sign PPAs for the rest of the power projects.

Apart from focusing on development and operation of power plants, IBPL is also augmenting its power project management capabilities. It has set up Elena Power & Infrastructure (EPIL), a wholly owned subsidiary. As it has no prior Engineering, Procurement and Construction (EPC) experience in the development of power projects, EPIL has entered into back-to-back contract with overseas players such as Shandong Electric Power Construction Corporation (SEPCO), China for the Amravati Phase I Power Project and with CNTIC-ZJ Energy Consortium, China for the Bhaiyathan Power Project. Having given engineering, procurement and construction (EPC) orders to EPIL from its own portfolio, IBPL proposes to develop EPIL as a project management company to tap and bid for power-project management contracts from third parties.

ICBPL, the special purpose vehicle for Bhaiyathan Power Project, has entered into a share subscription agreement with CSEB, dated 13 October 2008. CSEB will acquire a 26% equity stake in ICBPL for consideration other than cash. In accordance with the consortium agreement on 30 December 2007, Sunflag Iron and Steel Company (SISC), entitled to 0.074% of the share capital of ICBPL, has exercised its right to subscribe. But the company has informed SISC that it will not be able to transfer shares prior to allotment of shares to a successor entity of CSEB. Further, SISC is entitled to exercise a call option to purchase shares up to 5.926% of the equity capital of ICBPL from the company. IBPL proposes to utilize a portion of the net proceeds of Rs 1435 crore to part finance the construction and development of the Amravati Power Project Phase I and the Nashik Power Project.

Strengths

All the thermal projects are located in Maharashtra and Chhattisgarh in the west zone load center, with one of the highest peak power shortages. The west zone experienced a peak power deficit of 19.6% in August 2009.

All the power projects, barring the Nashik Power Project, are based on super critical technology, giving better plant efficiency and consuming lower coal compared with a sub-critical power plant.

Has applied for approvals to develop the power projects located at Amravati (Phase I & II) and Bhaiyathan under the mega power project scheme, thereby entailing certain tax benefits including customs and excise duty exemption on purchase of equipment. Similarly, the Nashik Power Project is coming up within the Sinnar Special Economic Zone (SEZ) in Nashik, proposed as a co-developer.

Weaknesses

No operational power unit

The first unit will go on stream only by June 2012. With increased additions in generation capacity in 2010-12, the peak deficit could moderate, thereby affecting the current high price realization from merchant sales of power. Moreover, with the Kyoto Protocol scheduled to expire in 2012, a new framework for the implementation of clean development mechanism (CDM) may not be brought into effect immediately. With the first unit going on stream only by 2012, there is uncertainty on the ability to avail CDM benefits.

Yet to appoint EPC contractors for two super critical projects & Nashik sub critical project

Of the five power projects (total 6,615 MW), the EPC contract has been placed for only two projects i.e. the Amravati Phase I Power Project and Bhaiyathan Power Project of 1,320 MW each. For other projects. i.e., the Nashik Power Project, Amravati Phase I Power Project, and the Chhattisgarh Power Project, the company is yet to initiate the process of appointment of EPC contractors.

The target to complete all the five power projects is September 2013. The long lead-time for supply of power plant equipment by domestic equipment manufacturer is, therefore, a concern. Alternatively, power plant equipment may have to be procured from global majors, particularly from China. But there is a general apprehension about the performance of Chinese power plant equipment. Domestic financial institutions are reluctant to fund projects with Chinese players as vendors.

No prior experience in development and management of power project / coal mines

No prior experience of development and management of power project. Reliance on Chinese companies for project management, supply, erection, commissioning of its power projects. Hitherto, Chinese companies deployed their personnel in India through business and visit visas. But, now, the government of India insists on work visas for Chinese workers. Work visas are not forthcoming easily. As a result, there may be delay in execution of the Amravati Phase Power Project and the Bhaiyathan Power Project as well as the project management and EPC contracts placed with Chinese companies.

Has been allocated two captive coalmines for the Bhaiyathan Power Project in Chhattisgarh by the ministry of coal. Has no experience in developing and operating a coal mine. As per the consortium agreement, SISC has the right of first refusal to carry out mining operations for the Bhaiyathon Power Project at competitive prices under the supervision of ICBPL. However, SISC's right to carry out mining operation shall cease to exist if it does not exercise its call option to purchase up to 5.926% shares of ICBPL. Without experience of operating coal mines, development and mining of these coalfields may affect the commercial operation of the linked Bhaiyathan Power Project.

Nashik project converted into sub critical project, but approvals are pending

The configuration of the Nashik Power Project has been revised. The capacity has been increased from 1,320 MW (2x660 MW) of super-critical plant to 1,335 MW (5X135 MW, 2X330 MW) of sub-critical units to bring down the gestation as the delivery schedule of super-critical units is higher. Preparation of the revised project document is underway. Has yet to receive relevant approvals. Refusal may affect the business plans. Pending approval for this change, EPC contractor for the Nashik Power project is yet to be finalized.

Bhaiyathan Power project bagged at very competitive levelised tariff

The Bhaiyathan Power Project was bagged amid stiff competition. Has to supply 65% (or 858 MW) of the power at a levelised tariff of Rs 0.81 per KWH. This tariff is much lower than Rs 1.19616 per Kwh of the Sasan ultra mega power project (UMPP) of Reliance Power. The distance from the coalfield to the power plant is approximately 85 km and coal is to be transported through rail network. This will add to the cost. The only advantage is that higher rate of 35% can be charged for merchant sales. Hence, the profitability of this project hinges on the ability to optimize realization on merchant power sales.

Financial closure achieved only for one project

Financial closure has been achieved only for the Amravati Phase I Power Project. In addition, commitment for a significant portion of the debt requirement of the Nashik Power Project has been attained. But tie-ups for funds for others including the Bhaiyathan Power Project are yet to be finalized.

Litigations

There are outstanding litigations against the directors, promoters and promoter group companies including criminal cases. Regulatory actions initiated against Inidabulls Securities, with common directors, by the Securities and Exchange Board of India and the stock exchanges.

Valuation

Currently. IBPL has no operational power plant. The first unit will be operational only by June 2012. Given this background, the company has priced its offer in a price band of Rs 40 to Rs 45. At the upper price band, the market capitalization will be Rs 9223.65 crore compared with the current market capitalization of Rs 174721.3 crore, Rs 38684.35 crore and Rs 22072.8 crore of NTPC, Reliance Power and Adani Power. The market cap per MW works out to Rs 1.39 crore per MW at the asking price of Rs 45. This is marginally higher than that of Reliance Power (Rs 1.17 crore per MW). On the other hand, the market cap per MW of Adani Power, which is expected to commission its Phase I & II of its Mundra Power Project (4x 330 MW) by February 2010, stands at Rs 3.34 crore and that of established player NTPC at Rs 3.51 crore.

Given the higher execution risks associated with the power projects enhanced by no prior experience of the group in setting up or operating a power plant, the asking price seems steep.