Indiabulls Power IPO

The Indiabulls Power initial public offer carries too high a risk profile for the average retail investor. The company is two years away from commissioning its first project in Nashik.

Other listed companies with operational plants may offer a superior investment option. The discounted pricing of the offer may allow scope for short-term gains on the stock, but long-term investors should put off their exposures until the projects make progress.At the higher end of the offer price of Rs 40-45, Indiabulls Power’s Market cap per Megawatt (taking into account only projects of 2,655 MW which have attained financial closure) is Rs.3.4 crore, which is similar to listed peers. On Price-Book Value terms, the offer is at a steep discount to NTPC, Tata Power, Reliance Power and Adani Power.

However, this discount is justified as Indiabulls Power will not enjoy any income from operations over the next few years.
Expansion plans

The company plans to set up 6,615 MW of thermal power generation capacity over the next four years at a cost of Rs 31,052 crore. Most of the projects are being developed through subsidiaries. Through this IPO, Indiabulls Power expects to raise around Rs 1,758 crore (at the higher end of the price band), including the green shoe option.

A part of the funds raised (Rs 1,435 crore) are to be deployed as equity in two projects — Amravati Phase 1 and Nashik — with capacity of 1,320 MW and 1,335 MW, respectively. Additionally, the company has signed MoU for projects adding up to 3,960 MW. The company also plans to set up a 167 MW hydro power plant in Arunachal Pradesh.

While two of the five projects — Amravati and Nashik — are close to attaining financial closure, the company, according to the offer document, is yet to raise funds for the other projects. Amravati Phase 1, to come up by June-September 2012, is the only project that has been fully tied up having secured fuel linkages, funding and placed EPC contracts. Equipment is to be sourced from SEPCO, China.

The Nashik project, due to change in its configuration, is yet to place equipment orders and is waiting for renewed approvals. The company’s hope of commissioning at least half of this plant’s capacity by September 2011 appears a challenging schedule to meet. Fuel linkages for both projects have already been approved. The third project in Bhaiyathan, Chhattisgarh, has been allotted a captive mine and is expected to be commissioned by 2013. The bulk of Indiabulls’ projects are scheduled for commissioning between 2011 and 2014. The bunching up of the completion dates may pose challenges on securing equity funding and execution.
rationale

The Indian power sector has historically been subject to high execution risks arising out of delays in equipment, funding, approvals and also laying of transmission lines. This pegs up the risk profile on this offer given that the company has no execution track record. Inconsistencies in supply of fuel by Coal India, on which Indiabulls Power plans to rely, is also a risk.

Funding is another concern as Indiabulls has opted for a debt:equity mix of 75:25. The current issue (Rs 1,758 crore) plus cash and investments of Rs 1,154 crore on its books as of June 30, 2009, as of now, fall short of equity requirement for the projects (around Rs 7,750 crore for all the projects).

In the regulated tariff scenario, debt raised over and above the norms may strain margins. Higher refinancing terms once the debt gets matured at higher rate of interest may also create problems for the company. In case of levelised tariffs, interest costs at a fixed rate are factored into tariffs. Indiabulls Power, like many other private players, is relying on Chinese equipment for timely delivery, which may reduce execution time but could lead to operational risk.
Some positives

Indiabulls Power’s current projects rely only on relatively cheaper domestic coal, which is a big advantage when the company offers its power on competitive bidding terms. Of course, this will benefit only the power sold on a merchant basis. The company wants to have a 75:25 mix between revenues through power purchase agreements and merchant power. If this materialises, the company can get the right mix of returns once operational.

Demand or offtake is the least of concerns for power generators, given the huge demand and supply gap that is likely to remain over the next few years. Revenue visibility is enhanced by Indiabulls Power signing long-term power purchase agreements for 858 MW with the Chattisgarh SEB for the power generated from Bhaiyathan project and 1,000 MW PPA with Tata Power Trading Company for the Amravati Phase I.

The company also signed MoU with Maharashtra State Electricity Distribution Company for off-take of 1,000 MW from its Amravati plant. It is yet to finalise buyers for the Nashik project. With the company planning to use super-critical technology for most of its capacity, additional revenues may also flow in through carbon credit.

via BL