Another Mega Power IPO - Adani Power

Adani Power, a part of Gujarat-based Adani group, is tapping the market to fund its power project. The issue is of 30.16 crore shares and would open on July 28, 2009 and close on July 31, 2009. The company had not declared the price band till the time of going to press. Also, we have done this analysis based on Draft Red Herring Prospectus as Red Herring Prospectus was not available while doing this analysis. Before we talk about the valuations and what should be the ideal price band for the company, let us understand the Adani Power business in a nutshell.

Adani Power presently does not have any power generating operations. As per the CFO of the company, the first 330 MW trial operations are on and the same would get go commercial very soon. The company would be setting up power plant with a total capacity of 6600 MW, of which 1980 MW capacity would be set up at Tiroda through its subsidiary Adani Power Maharashtra in which it has 76.64 per cent stake. All power plants of the company would be coal-based which are scheduled to commence commercial production in a staggered manner, with the last plant scheduled to be fully commissioned by April 2012.

The total project cost is Rs 28,369 crore and the same would be financed in debt-equity ratio of 4:1. The company claims that all debts for the project has been finalized. The company is making public issue to part-finance its Mundra Phase IV project of 1980 MW and also to fund equity contribution to its subsidiary which is setting up a project of 1980 MW. Looking at the means of finance, one gets the feeling that the company is looking at near about Rs 2,200 crore from the public issue.

As far as the financials are concerned, the company hardly has anything to talk about as the power plant is yet to go on stream. But FY2010 would have some financial operations as company is hopeful of commencing commercial production of 1320 MW. This should generate some revenue for the company, but it’s unlikely to result into significant profit as power plants have longer gestation period for generating profit. Due to this, one has to value the company based on Enterprise Value (EV). The company’s cost of setting up one MW works out to Rs 4.30 crore which is in line with the industry norms. Also, the company has coal linkages for its plants and this is also a good sign. Based on companies that had gone public in the recent past like KSK Energy and Reliance Power wherein both had made public issues to fund their power plants, we feel Adani Power should command market cap in the region of Rs 12,000-12,500 crore. We have compared Adani Power with KSK Energy which ultimately would have 9,137 MW capacity by 2012 and presently has a market cap of Rs 6,579 crore. NTPC, presently the largest player, has EV per MW at Rs 6.53 crore (based on the existing capacity), while based on our estimated market cap, the EV per MW of Adani Power comes to Rs 5.31 crore which we feel is fair as Adani is yet to start scaling up its operation and has relatively small size. Based on the market cap calculated by us, we feel that the price band for the company would be in the region of Rs 50-55, thereby leaving something on the table for the investors. We would revisit the IPO when the company declares its price band and the same would be available on our website www.dsij.in.