The price band for Adani Power is Rs 90 –Rs 100. The issue has already opened on Tuesday the 28th of July 2009 and closes on Friday the 31st of July 2009.The issue is for 30.165 cr shares and would raise a sum of Rs 2714.85 crs to Rs 3016.50 crs at the lower and higher price band respectively. The issued share capital post the present issue would be Rs 2180.04 crs and the dilution would be 13.84 %. The promoter group holding pre- issue is 85.30 % which would get diluted and reduced to post issue holding of 73.50 %.

The Global co-ordinator and book running lead manager to the issue is DSP Merrill Lynch Limited. The book running lead managers are Enam Securities Private Limited, IDFC-SSKI Limited, J M Financial Consultants Limited, Kotak Mahindra Capital Company Limited, Morgan Stanley India Company Limited, ICICI Securities Limited and SBI Capital Markets Limited. The issue has been graded by ICRA as IPO grade 3 indicating average fundamentals. ICRA in its letter dated 2nd July 2009 addressed to the company and forming part of the RHP has mentioned “The rationale for assigning the above grading will be sent to you in due course”.

Objects of the issue

The objects of the issue are to part finance the construction and development of Mundra Phase IV power project of 1980 MW and funding equity contribution in the subsidiary Adani Power Maharashtra Limited to part finance the construction and development cost of power project for 1980 MW at Tiroda, Maharashtra.

The Adani Group currently has four thermal power projects under various stages of development: Mundra Phase I and II Power Project will have four sub-critical generation units of 330 MW each, with a combined capacity of 1,320 MW. The company expects to commission the first 330 MW unit of Mundra Phase I and II Power Project by July 2009, and that the power project will be fully commissioned by February 2010. Mundra Phase III Power Project will have two super-critical generation units of 660 MW each, with a combined capacity of 1,320 MW. The company believes and currently expect that the first 660 MW unit of Mundra Phase III Power Project will be commissioned by January 2011, and that the power project will be fully commissioned by June 2011. Mundra Phase IV Power Project will have three super-critical generation units of 660 MW each, with combined capacity of 1,980 MW. The group currently expect that the first 660 MW unit of Mundra Phase IV Power Project will be commissioned by August 2011, and that the power project will be fully commissioned by April 2012. Tiroda Power Project will have three super-critical generation units of 660 MW each, with combined capacity of 1,980 MW. The company currently expects that the first 660 MW unit of Tiroda Power Project will be commissioned by July 2011, and that the power project will be fully commissioned by April 2012. Adani Power’s 77.38% Owned subsidiary, Adani Power Maharashtra Limited (“APML”), is developing the Tiroda Power Project in Maharashtra.

Adani Power is also planning to develop two thermal power projects at Dahej and Kawai with a combined installed capacity of 3,300 MW, but no fund raising for this project is currently planned or to be implemented.

Concerns

There are issues concerning the profitability of Adani Power based on imported Indonesian coal. Coal will be sourced from Adani Enterprises Ltd at a price of US $ 36 per tonne (CIF Mundra). This price appears to be low and may not be sustainable going forward. There have been in the recent past many instances of the Indonesian government asking a lot of coal companies to renegotiate under – priced coal contracts. This could be a substantial risk to Adani Power’s coal supply. Further production ramp up of the Bunyu mines also looks an extremely challenging task given the difficult terrain and poor existing infrastructure.

Adani Power entire capacity is based on Chinese equipment. There are quite a few concerns which have been raised about the quality and life of Chinese equipment. Two concerns do however remain: – namely PLF’s obtained by Chinese equipment and second the issue of IPR issues.

Grey Market

We all remember Reliance Power which came out with a mega issue in January 2008 and raised Rs 11560 crs from the capital market at a price of Rs 450. The market cap at issue price was approximately Rs one lac crs and this was for projects which covered approximately 20,000 MW. The retail investors were offered an incentive and were given a discount of Rs 20 per share. The response was over whelming and what happened thereafter was history. In the grey market, where at one time the share premium was trading higher than the issue price, crashed and it is rumoured that commitments were not honoured. The pressure on the share was so much that it crashed and the management to please shareholders announced a bonus issue for only non-promoter shares in the ratio of 3 shares for every 5 shares held. Inspite of the bonus whereby the cost of shareholders reduced from Rs 450 to Rs 281.25, the share made a low of Rs 82 ex bonus. As of yesterday the share price closed at Rs 174.55 on the BSE and the current market cap is Rs 41836.14 crs.

Another fact that we must all remember is that grey market premiums have a nasty habit of simply, suddenly disappearing. This phenomenon is unexplainable but time and again it has happened.

If you like Adani Power buy NTPC

Coming to Adani Power the market cap at issue price would be Rs 19620.36 crs at the lower price band and Rs 21800 crs at the higher price band. The debt for 6600 MW is approximately Rs 20000 crs. If we were to add the two and divide by 6600 MW the approx cost per MW comes to 6 crs at the lower band and 6.33 crs at the higher end.

Let us compare the same with India’s largest producer of power today, NTPC. Their current capacity in generation or operation is 30,644 MW with an additional capacity of 3300 MW or half of Adani Power’s 6600 MW capacity to be set up in next three years to be commissioned by NTPC by March 2010. This would take NTPC to 33944 MW. Besides the above they have projects under implementation of another approx 12500 MW which would certainly be ready in the next three years. Yet another way of saying this would be that double the proposed capacity of Adani would be added in the next three years taking NTPC to approximately 46500 MW. The market price of NTPC as of yesterday on the BSE was Rs 217.30 and the market cap at Rs 179,173.84 crs. The company has earned an EPS of Rs 9.95 for the year ended March 2009 and Rs 2.66 for the quarter ended June 2009. The average PLF (plant load factor) achieved by NTPC is 91.14 %. NTPC with a market cap of 1.79 lac crs and a generating capacity in operation of 30644 MW is available at a cost of 5.84 crs per MW and additionally an EPS of Rs 9.95 for March 2009. If the same were to be based on the year end capacity of March 2010 the cost per MW reduces to 5.28 crs and if we are to talk about the three year hence capacity of approximately 46500, the cost per MW would be 3.85 crs. The company is in operation with revenues close to Rs 42000 crs for the year ended March 2009 and net profit after tax of Rs 8200 crs for the same period.

Conclusion

Looking at all of the above it appears apt to believe that better opportunities exist in the market currently in the form of NTPC and even Reliance power. In the medium term history has shown that IPO prices soften after listing and opportunities for fresh investment are always available.

The call to invest or not to invest is always with the investor. If you believe you have the conviction and determination to sell at 9.56 am on listing day irrespective of the price you may apply. Please also remember that almost everybody who is applying wants to be out of this counter within a few minutes of listing. One must also remember Reliance Power and vanishing grey market premiums.

SEBI Disclaimer:- I do not intend to subscribe to the above share issue.