Adani Power Limited, a power project development company, promoted by Adani Enterprises, a flagship company of Adani Group, is tapping the IPO market with an issue size of Rs 2,714-3,016 crore, based on the 301,652,031 shares of face value Rs 10 being offered at price band of Rs 90-100.
This issue is expected to test investor risk aversion, as analysts reckon that the price band is a tad aggressive.
The proceeds will be used to fund the equity contribution in the company’s subsidiary, Adani Power Maharashtra Limited, to partly finance the construction and development of the 1,980 MW Tiroda Power Project, partly finance the equity for the Mudra Phase 4 project and other general corporate purposes.
The positive factors
Given the huge shortage in the power generation capacity and the positive growth expected in the Indian economy, the business outlook looks strong. In fact, promoters look forward to gain from these initiatives to take their presence in this sector further. Analysts expect Adani Power to be one of the highest generation capacity builders amongst the private sector players in the Eleventh Plan, as it plans to increase its capacity, which stood at 330 MW June 2008, to 6.6 GWMW by April-2012. Adani Enterprise Limited, with revenues of around Rs 19,609 crore in fiscal 2008, has a decent record of profitability and has been a consistent dividend payout. It also issued bonus shares in 1999 and 1996.
The parent company of Adani Power is one of the three largest coal traders in India and over the last three years has also become the largest power trading company in India. The Adani Group currently holds over 85% stake in Adani Power and after the public issue, the promoter stake will be reduced to 73%. Gautam Adani, chairman and promoter of the Adani group, is likely to get richer by Rs 10,682 crore by the selling his stake via this issue.
The company has recently raised Rs 370 crore through a pre IPO placement of 3.61 crore shares (1.7% of the post issue capital) at an average price of Rs 104 per share. This sounds encouraging from an investor’s perspective. However, 91 lakh shares have been issued to private equity investor, 3i Capital, at Rs 81 a share. The promoter group company acquiring the balance 2.69 crore shares at the price of Rs 112 per share, should be seen as ‘mildly’ positive.
Concerns
Analysts at Motilal Oswal Securities calculated the net present value for Adani Power assuming two scenarios factoring in different operating parameters like plant load factors PLFs or capacity utilisation for power plants, heat rates, auxiliary consumption, cost of imported coal, merchant tariffs. According to the analysis, the pre-money valuation is in the range of Rs 68 to 93 per share. “We believe the IPO valuation is demanding and factors in project execution.” Project execution is the key.
There have been many power generation companies, which have tapped the capital market and have been suffering from the malaise of slower execution issues.
“However, the upside can come in from reinvestment of cash flows in future projects and higher merchant tariffs,” add analysts. They reckon that Adani Power will have operational merchant capacity of 2.2 GW in FY2012 and 2.7 GW in FY2013, up from 485MW in FY2011 and 370MW in FY2010.
It is expected that the company will be able to generate a net profit in the next two years especially from FY2012 onwards, say analysts. This increases the risk profile of earnings to merchant tariffs and commissioning schedule as delays will lead to lower contribution.
Overall, raw materials should be of no issue for the company at all as Adani Power would have easy access to coal, the basic raw material for power generation since its parent company, Adani Enterprises has a lot of interest in coal and is a major producer and trader. Also, Adani Power has entered into a firm fuel supply agreement with Adani Enterprises for supply of 15 m tonne of imported coal from Indonesia at $36 per tonne on CIF basis, substantially lower than market prices.
Here, analysts are concerned about regulatory risks and other issues associated with coal linkages. However, at the moment it looks like the management has covered this area.
But the main contention arises from the fact that the company would be relying on Chinese equipment. “Quality of Chinese equipment has been a key debatable issue in the Indian power context,” say analysts with MOS.
While Chinese equipment offers lower cost and quicker delivery time periods, the key point of contention has been the limited track record of such projects to operate on Indian coal and IPR related issues for super-critical projects, they add.
And, Adani Power has achieved financial closure for all its projects under development with a debt to equity ratio of 80:20, and close to 30% of capacity on merchant basis. This compares with the normative debt to equity ratio of 70:30, followed by regulated utilities like NTPC, DVC and Powergrid, and many private sector players have achieved financial closure at 75:25 as well (Sasan UMPP, Mundra UMPP, GMR Kamalanga, etc). Hence, this ratio, is seen to be aggressive by analysts.
Conclusion
According to MOS analysts, the pre-money valuation range is seen in the range of Rs 68 to 93 per share, hence, a tad aggressive. The key factors therefore would be execution and the upside can come in from reinvestment of cash flows in future projects and higher merchant tariffs.
Clearly, this issue is for those who strongly believe in the outlook of the power sector and even more on the management abilities to execute projects and then manage them. Apart from these verticals the parent company is operational in, they also own and operate a part of the Mundra, SEZ port, which apart form its landscape advantages also gives the parent company enormous tax breaks.
Projects in pipeline
Adani Power Limited has four thermal power plants in various stages of development:
• Mundra Phase 1 and 2 with a capacity of 1,320 MW. Both phases will have sub-critical generation units of 330 MW each. The first unit is expected to get commissioned by June 2009 and the full project by Feb 2010.
• Mundra Phase 3 with a capacity of 1,320 MW, will have two super-critical generation units of 660MW. The first phase will be commissioned in Jan 2011 and the entire power project by June 2011.
• Mundra Phase 4 project with a capacity of 1,980 MW. This will include three super-critical power generating units of 600 MW. The first will be commissioned by Aug 2011 and the remaining by April 2012.
• Tiroda Power Project will have a capacity of 1,980 MW again with three super-critical power generating units of 660 MW. The first 660 MW unit will be commissioned by July 2011 and the remaining by April 2012.
• Apart from these, the company also plans to develop two thermal power projects at Dahej and Kawat, with a combined energy capacity of 3,300 MW. These projects are not part of the IPO valuation as such and hence if completed, the investors will benefit by owning a share of the further 3,300 MW over and above the 6,600 MW already commissioned.
Projects under development
The group itself is looking at vertical integration with power projects and it currently has presence in:
• Coal Mining
•Coal Trading
• Shipping
• Power Generation
• Power Transmission
• Power Trading