A Good Bet

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It seems that the power companies are making the most of this market rally once again and tapping the primary market to fund their expansion plans. Indiabulls Power (IPL), the subsidiary of Indiabulls Real Estate, is the third such company this year – after Adani Power and NHPC – to tap primary markets to raise funds. Established in 2007, the company has five projects under development namely the Amravati Phase I (1320MW), Amravati Phase II (1320MW), Bhaiyathan project (1320MW), Nashik project (1335MW) and the Chattisgarh power project (1320MW), which will result in a combined capacity of 6,615 MW. This entire capacity is expected to be commissioned by 2013 (refer table). But it should be noted that apart from the Amravati Phase I and Phase II power projects, which would be set up by IPL itself, the remaining three projects would be set up by its three subsidiaries namely the Indiabulls Realtech (Nashik project), Indiabulls CSEB Bhaiyathan Power (Bhaiyathan project) and Indiabulls Powergen (Chattishgarh project).

The total cost of these projects Rs 31,052 crore, which is being funded with a combination of debt and equity. The company has already tied-up debt for its Amravati Phase I and Nashik project, while the debt arrangements for the remaining three are yet to be done.

For the purpose of this IPO, IPL has shortlisted the Nashik and the Amravati Phase I projects as the beneficiaries of the issue proceeds. IPL is coming out with an issue size of 33.98 crore equity shares and has set the price band at Rs 40-45. The company has also kept a Green Shoe Option of 5.09 crore shares. But we have not considered these shares while valuing the company. Through this issue, IPL would garner around Rs 1359.2-1529.1 crore and, out of the amount, Rs 775 crore would be used to part-finance Amravati Phase- I, while Rs 660 crore would be deployed towards the Nashik project.

Though this looks smooth, there are some concerns which cannot be ignored. First and foremost, although Indiabulls as a group has done quite well since its inception, the group is trying too much diversification. Secondly, though it had diversified previously, it was more into services industry, may it be financial, broking, etc, but now with its foray into power, IPL is entering into assets-based business for which it doesn’t have the requisite experience.

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That apart, power projects usually have long gestation periods and hence it will be some time before IPL starts making money. Thirdly, IPL as a standalone company would only start earning revenues after June 2012 when its first unit of 660 MW of Amravati Phase I gets commissioned, which is two fiscals away and certainly a long time to judge a company. Besides, such huge projects usually get delayed and if that happens with IPL then it could only delay its revenue generation further. But having said that, there is a silver lining to IPL too. Firstly the company has been successful in getting coal tie-ups for Amravati Phase I, Nashik and the Bhaiyathan projects, which is a good sign. Secondly, the company has also entered into long-term power purchase agreement (PPA) with Tata Power for sale up to 1000MW power from the Amravati Phase I project, while it has also entered into PPA with Chattisgarh State Electricity Board (CSEB) for sale of 65 per cent of power from Bhaiyathan project.

On financials, there is hardly anything to talk about as its power plants are yet to go on stream. On valuations, Indiabulls Power is available at EV/MW of just Rs 4.47- 4.62 crore, which is at a discount to similar capacity comparable peer such as Adani Power whose EV/MW is Rs 5.54 crore. Thus there exists a clear valuation gap, making IPL a good bet. Hence, investors can subscribe to this IPO, but with the concerns mentioned above, we don’t expect IPL to give appreciation as much as the other listed entities of the Indiabulls group have given in the past.