Invested in IPOs? What Should You Do Now?

By successfully raising about Rs 3016.52 crore through its IPO in July 2009 to fund two of its four power projects, Adani Power became part of the list of mega IPOs and an even more selective list of the mega power IPOs. Despite the fact that the investors had burnt their fingers in other power IPOs, Adani still managed a handsome response with an oversubscription of 51x.

But a very subdued listing with a listing gain of just around five per cent, and the sluggish movement of the scrip till date, clearly shows how wary investors still are about power stocks. The only consolation for investors in this case is that, at a CMP of Rs 110, it is still above its issue price with returns of 11 per cent. Certainly not much, but still good enough considering that most other peers still are trading substantially below their issue prices. So what is the differentiating edge that keeps Adani above its issue price?

The execution capability of the company is what makes it different. Adani has been successfully commissioning its projects in line with what it had promised in its IPO prospectus. As of June 2011, the company has built a total operational capacity of 2640MW. This we believe is quite commendable considering that its peers, especially the PSUs have faced execution problems.

In fact the utilisation of funds as on March 31, 2011 shows that the company has fully deployed the issue proceeds in the projects they were raised for. Thus, effectively Adani Power should have a total operational capacity of 6000MW by FY12, with the balance 600MW spilling over to the next fiscal. Besides, what augurs well for this company is that it not only received the maximum coal allocation possible for its Mundra and the Tiroda project, but also has a long term power purchase agreement (PPA) for more than 80 per cent of its capacity. This will help it start generating incremental revenues as soon as more capacities start coming on stream. However, the only concern is the valuation. At FY11 numbers an EV/MW of Rs 15 crore is quite steep when compared to its peers. However, we believe the scrip is trading at a premium on account of its on time commissioning of capacities, good revenue visibility due to long term PPAs, fuel tie up etc. But despite this no fresh exposure is advised at the current levels, though those who are invested already can stay put for a longer term.