IPO of Adani Power at top end Rs 100….Aggressive Pricing makes it an Aggressive Investment

A few observations on the IPO of Adani Power (APL)

At the Outset

The Flavour of this Season’s Bullish Momentum is the Power Sector and APL’s IPO takes advantage of this by aggressively pricing in the Rs 90-Rs 100 band….Momentum should list APL in positive territory…Rs 110-Rs 120…Grey Market Premium is around Rs 10 and Application Financing Schemes are being put in place by a few Finance Houses,indicating some level of confidence of comfortable oversubscription…Nevertheless,APL should certainly not qualify as an  exciting listing.

However on DCF Valuation it appears fully priced at the IPO Pricing band in the short term…Any move past Rs 150 and towards Rs 200 should come only a couple of years down the line when the market quotes begin to reflect what Markets understand best…. Earnings Multiples….Liberal Multiples will respect timely implementation of the projects without significant cost overruns…..so keep a ‘Power’ful ‘Nazar’ on APL’s Quotes and if there are any bearish waves in the next two years and APL dives into Rs 50-Rs 60 territory,even though projects are more or less on schedule,then plug into APL

Plugging into APL through the IPO at the Aggressive Price of Rs 100 is Aggressive Investing

On APL and it’s Promoters

• APL was incorporated way back in 1996,added ‘Private’ to it’s name in 2002 and in 2007 reverting to a Public Company
• APL is part of the Adani Group of Ahmedabad…This Group was founded by Gautam Adani whose education, interestingly, was only up to matriculation
• The Adanis are symbolic of the aggressive entrepreneurship that India has witnessed post the reforms initiated in 1991…They have a colourful history in that they have had several brushes with regulatory authorities…SEBI,Enforcement Directorate etc
• The Groups Interests are diverse…International Trading,Infrastructure Development,Power Generation and Distribution,Development of Special Economic Zones (SEZ),Gas Distribution,Trading and Business Process Outsourcing 
• Adani Group includes two Listed Companies,Adani Enterprises Ltd (AEL and Earlier called Adani Exports) and Mundra Port and Special Economic Zone Ltd (MPSEZL)…..AEL’s IPO was way back in November 1994 when it raised just Rs 18.93 crs issuing 1261900 Equity shares of FV Rs 10 at Rs 150 each…MPSEZL was an ambitious Project and it’s IPO  came in November 2007 when it raised Rs 1771 Crs isssuing 40,250,000 Equity Shares of FV Rs 10 at Rs 440 and as of March 31,2009,Rs 786 crs,or 44% of Issue Proceeds, is yet to be utilised

APL’s Power Projects 

• APL is a Power Projects Development Company…It is planning Projects of 9900 MW…It already has Four Thermal Power Projects in various stages of Development aggregating 6600 MW at Mundra (4620 MW,Gujarat) and Tiroda ( 1980 MW,Maharashtra) with the Tiroda Project to be developed by a subsidiary,Adani Power Maharashtra Ltd (APML) and Two Thermal projects aggregating 3300 MW are planned for developement by wholly owned subsidiaries APDL and APRL at Dahej (1980 MW,Gujarat) and Kawai (1320 MW,Rajasthan) respectively
• The Power Projects in Mundra will aggregate 4620 MW and will be commissioned in four phases (Phase I & II : 4 * 330 MW…Phase III : 2* 660 MW…Phase IV : 3* 660 MW) from July 2009 to April 2012 while the Power Poject in Tiroda will aggregate 1980 MW ( 3* 660 MW) to be commissioned from July 2011 to April 2012
• Power Equipment Supply and Machinery Contracts are being executed by several Chinese Companies

APL’s IPO

• ICRA has assigned IPO Grade 3 to this IPO indicating ‘average fundamentals’…Gradings are from 1 to 5 ,with 5 being the best
• APL is pricing this IPO in the Rs 90-Rs 100 range…ten times face value at the top end 
• Issue will open on July 28,2009 and close on July 31,2009
• IPO will raise Rs 3016.52 crs at top end price Rs 100…It is issuing 301,652,031 Equity Shares that constitutes 13.84% of the post paid Capital of Rs 2180 crs
• There are Eight Book Running Lead Managers for this IPO…all the leading names….all wolves run in a pack !
• Mundra Phase IV and Tiroda Power Plants aggregating 3960 MW require a funding of Rs 18223 crs,of which the APL IPO will contribute Rs 2193 crs…Rs 1153 crs for Mundra and Rs 1040 crs for the equity contribution to subsidiary Adani Power Maharashtra Ltd (APML),which is to develop Tiroda…This means the remaining Rs 823 crs of IPO Proceeds will be for General Corporate Purposes…Now that’s a huge amount…IFCI has been appointed to monitor end use of the IPO Funds…a lot can flow under ‘General Corporate Purposes’ 
• Incidentally APML has alloted shares at par face value of Rs 10…. On January 15,2008,it alloted 37,500,000 Equity Shares to Millennium Developers for Rs 37.50 crs…then It issued shares,twice this year to Somerset Fund…3.3 crs shares for Rs 33 crs on March 27,2009 and 2 cr shares for Rs 20 crs on may 18,2009…APML will develop and operate Tiroda directly,while being a subsidiary of APL…Consolidation of Accounts will show APML earnings reflected too in the APL Group Accounts as APL will hold 77.38% of the APML Equity
• APL already has 3737 Members on it’s books at the time it filed it’s RHP…most are not original allottes…a lot of private transfers seems to have taken place
• Post IPO,The Promoter Group will hold 1,602,318,997 Shares of APL…that’s 73.50 % of the Equity…of this AEL holds the major chunk of 1,531,440,000 Shares at an average of Rs 5.56  

APL’s Valuation

Book Values

• As on March 31,2009,APL’s Book Value was just Rs 12.35,represented by a Networth of Rs 2278.39 crs….Equity was Rs Rs 1842 crs and Reserves and Surplus was just Rs 451.7 crs…Rs 15.31 crs were minor debits in the Misc Ex and in the P & L A/c  
• Subsequent to March 31,2009 and pre IPO ,APL has further alloted 36,406,933 shares in the range of Rs 70 to Rs 111
• Post Issue the Capital will be Rs 2180 crs (Moving up from Rs 1878 crs)and Share Premium Reserves will move up from pre IPO level of Rs 792 crs to Rs 3507 crs,assuming top end pricing of Rs 100…This would compute to a Book Value of Rs 26 with Networth being Rs 5687 crs…so the IPO Top End Pricing of Rs 100 would be four times it’s Post Issue Book Value but eight times it’s March 31,2009 Book Value of Rs 12.35 and seven times it’s pre IPO Book Value of Rs 14.23 and Ten times it’s Face Value…That’s high,though the Reliance Power issue was priced even above our atmosphere !

Earnings Multiples….these look to stimulating some excitement in valuation

• APL has yet to commence commercial operations….it is scheduled to commission 6600 MW inside three years,with a large chunk of 2640 MW only in April 2012…since it has tied up Financing for this,and if there are no project delays and significant cost overruns,we can expect that FY 13 Group Accounts will reflect full earnings on this capacity…That should give Consolidated Earnings in the range of Rs 3500 to Rs 4500 crs throwing up an EPS range of Rs 16-Rs 20   and a ten multiple will give a Share Price range of Rs 160 to Rs 200…so we could say that APL even at IPO Pricing of Rs 100 looks like a doubler in three to four years even with the  Debt/Equity Ratio at 4 …70 debt/30 equity is the Funding norm for the Power Sector…APL,however, would be close to 80/20 with the project costs at Rs 28369 crs for 6600 MW

Coal Supply Agreements are in place with Promoter Company AEL for the Mundra Project.AEL will be importing Coal….APL has shown AEL’s Indonesian Coal Mining rights and the New Mining Law of Indonesia as a Risk factor

DCF Valuation

• Considering that the Power Generation Business involves Long term (25 years) PPAs,it’s resembles an Annuity Model…This makes DCF an ideal Valuation basis
• As major capacities are to be commissioned only towards 2012,APL will show negative cashflows for the next three years on account of capex spend
• Notwithstanding that several operational and financial variables can impact the NPV,the DCF Valuation, using WACC of 11% to13% ,shows that APL’s Value would lie in the range of Rs 75 to Rs 125….IPO Pricing Band of Rs 90-Rs 100 thus leaves nothing much on the table if DCF Valuation is considered

Peer Group

• Based on Book Values,APL is priced higher than NTPC and Reliance Power
• Using Market Cap/MV parameter, APL at Rs 3.30 crs/MW keeps up with it’s Peers
• It’s Earnings Multiples of 5 for FY 13 Earnings that’s stirring some excitement in APL….APL’s commissioning of 6600 MW by 2012 will temporarily eclipse Reliance Power,which will be able to unleash greater capacities only by 2014/5…and Reliance Power quotes at Rs 170   

Coal Supply and Power Purchase Agreements

• Mundra Project is being fueled by Imported Coal through AEL…APL has listed AEL’s Indonesian Mining Rights and the New Mining Law in Indonesia as a risk Factor
• Tiroda Project will be fueled by domestic Coal. APML has also received letters from Mahanadi Coalfield and South Eastern Coalfields and Western Coalfields for specifed Coal Committments subject to conditions.APML  has also been allocated Mining Rights by the government for it’s Tiroda project…APML has no experience in Coal Mining and the allocation is subject to fulfillment of several conditions 
• Power Purchase Agreements have been signed with State Electricity Bodies for 4744 MW of the 6600 MW at Prices beginning at Rs 2.35/kWh in the first year to Rs 3.47/kWh in the 25th year
• Merchant Power Tariffs are currently much higher at Rs 6-Rs 6.50/kwh as Gujarat and Maharashtra,India’s highest Industrial Growth States,remain power deficit States…they will drop as Power Supply and Demand Imbalance reduces over the years

Conclusion

I’m not a great fan of the Adanis and moreover this aggressive IPO pricing is a hurdle in unconditionally recommending it for subscription …to be fair,it’s not crazy like the Rs 450 Pricing of Reliance Power’s IPO in Feb 2008

Another reservation…..With BHEL overloaded with orders and not able to ramp up it’s capacities fast enough,APL may have had little choice in opting for Chinese Contractors….So there are reservations even on quality and execution issues…It would be a first time in India ,on scale,that Chinese Companies would be engaged in our Power Sector,for setting up, both, sub critical and super critical coal based thermal plant technologies and equipment

It’s a major ‘Chinese Checkers’ risk that the Adanis have taken the lead in taking…Will this risk pay off ? It’s a near US $ 6 Billion Question…that’s the  cost of setting up 6600 MW Oh ! in this context,an interesting name propped up in the Pre IPO Top 10 Shareholders List…Chang Chungling…holds 930000 shares 

You want to play this IPO,then go ahead after assessing the Game range on listing

I think the PSU,NHPC at Rs 30 (strong indication of this pricing) on August 7,2009 may be a more interesting IPO option

Cheers