Indiabulls Power Ltd (IPL), part of Indiabulls Group, will launch its high-profile initial public offering (IPO) on Monday. The company, which plans to generate both thermal and hydro power, is entering into the highly sought-after and supply-deficient power sector.

On the face of things, their price band of Rs 40-45 per share looks to be sound. However, the promoters seem to be building on their goodwill generated from its other listed company and using it in this issue.

At present, there are a lot of uncertainties dogging the issue that could give the real long-term investor some comfort. The fact that there is a deficit in the power sector is not the only reason for an IPO in that sector to succeed.

IPL is raising equity 3-4 years before they will generate any positive cash flow from operations, and this too, if everything goes as per the plan. This is a huge operational risk as execution of a project in the power sector has seldom met targets. The fact remains that at best, IPL, which has no operational power plant at the moment, may, if all goes well, have its first unit operational only by June 2012. And what happens till then is anybody?s guess.

While the quantum of the investment seems small and the fact that there are enough anchor investors do bring in some confidence, especially for the long-term investors, but there are a lot many concerns regarding short-term investments. Subsequently, many of them can move over to the long-term zone.

The real concerns the analysts have brought out that the market capitalisation per mega watt works out to be at around Rs 1.39 crore at the asking price of Rs 45 per share. This is marginally higher than that of Reliance Power at Rs 1.17 crore per mw at a much higher asking price though. However, the market has already absorbed Adani Power issue atRs 3.34 crore (Mundra) and that of NTPC at Rs 3.51 crore, say analysts. So the pricing seems to be stable. All eyes, therefore, will be on execution.

Some of the positives, however, hover around the fact that the promoter?s shareholding will not drop drastically, indicating that they have strong confidence in the project.

Issue details

The issue available to the public is of 33,98,00,000 equity shares of Rs 10 each. This along with a green shoe option of selling another 5,09,00,000 equity shares is available to the company. They will be raising Rs 1,359 crore at lower price band of Rs 40 and Rs 1,529 crore at higher price band of Rs 45. The issue and the green shoe option, if exercised in full, will aggregate to 39,07,00,000 equity shares, enabling the company to raise a maximum of Rs 1,758.15 crore via this issue

The issue will constitute 16.98% of the fully diluted post issue paid-up capital of the company assuming that the green shoe option is not exercised and 19.06% of the fully diluted post issued paid-up capital assuming that the green shoe option is exercised in full.

The promoters in this case will either hold 59.23% of the post issue capital of the company or 57.76%, based on the green shoe option. The issue also has the option of selling to anchor investors which it has already done, having sold 17% of the issue to these investors. That is, 6.1 crore shares at the higher price band of Rs 45, which means before the issue opens today, the company has already raised Rs 274.5 crore share.

Background

Indiabulls Real estate (IBREL), one of the fastest growing and largest real estate companies in the country, promotes this project. Currently, the company has five thermal power projects under development. These projects will have a combined installed capacity of 6,615 mw and should be operational by September 2013. The total capital required for financing all these projects is estimated to be Rs 31,000 crore. Again, 5,280 mw of supercritical power generation capacity is to be installed, while evaluations to establish of a 1,320 mw coal-based thermal power project in Jharkhand and a 2,640 mw one in Chhindwara, Madhya Pradesh are in the pipeline.

Objectives

The net proceeds of the issue are proposed to be utilised to part finance the construction and development of the 1,320 mw Amravati Power Project (Phase?I), fund the equity contribution in the company?s wholly-owned subsidiary, IRL, to part finance the construction and development of the 1,335 mw Nashik power project; and for general corporate purposes.

The amounts proposed to be financed from the net proceeds of the issue towards the two projects are Rs 775 crore for the Amrawati Phase-I project and Rs 660 crore for the Nashik power project.

Strengths

The company has been granted coal linkages by ministry of coal for its Amravati Phase-I power project and the Nashik power project. The company has also received letters of assurances for supplying coal from Western Coalfields and South Eastern Coalfields for the Amravati phase-I power project and from Mahanadi Coalfields and Western Coalfields for the Nashik plant. Additionally, the ministry of coal has allocated two captive coal mines in Chhattisgarh for Bhaiyathan Power Project. While this does ensure that the company will have a steady supply of fuel for the power plants, the pricing of the raw material may or may not have been fixed, as so far the company board refused to comment on the matter.

The company has also signed memorandum of understandings (MoU) for developing coal-fired thermal power projects aggregating to 3,960 mw with the state governments of Jharkhand and Madhya Pradesh and a MoU with the government of Arunachal Pradesh for developing four hydro power projects with an aggregate capacity of 167 mw.

The company has also entered into a long-term PPA with Tata Power Trading Company Ltd (TPTCL) for the sale of up to 1,000 mw of power proposed to be generated at the Amravati Phase-I power project. The PPA with TPTCL is for a term of 25 years from the date of commercial production of the first unit. However, here too, pricing details of the PPA remain undisclosed, making it difficult to gauge the extent to which this venture will benefit IPL.

Overall assessment

The company has no experience in the field of power generation and this is its first serious venture into power industry. There are, currently, no operational power plants or other revenue-generating operations in its kitty. The company is expected to start showing some operational income by 2011 or early 2012 by when one of their plants may get operational. Any delay in these plans could adversely affect the company?s financial position. Also, this industry being capital intensive and cash flow negative for that matter, if the company does not start producing power by the scheduled time, their cash flow statements will be further affected and this may seriously hamper the company?s ability to raise additional funds, if required.

The company estimates that it will require Rs 31, 052 crore for the projects under development. This is being financed through 75% debt and 25% equity basis as of now, giving the company a high debt equity ratio to start of with. This also means that if the company needs to raise more debt, they will have also to raise more equity so as to maintain this necessary ratio.

While the management has, for its other projects, garnered market presence and acceptance at a certain level, the dynamics of power projects are rather unique and therefore, worth to wait and watch.