Indiabulls Power Limited (IPL) is tapping the capital markets to raise between Rs 1359 crs to 1529 crs. The issue opens today and closes on Thursday the 15th of October. This is the third power generation company issue in three months after Adani Power and NHPC. For any meaningful comparison the same should be done with Adani Power and NHPC.

The Project

IPL is in the process of setting up the following power projects.

• Amravati Phase I – Super critical 660 MW x 2 = 1320 MW. Total cost of Rs 6888 crs. Coal linkage in place, debt tied up, Expected commissioning June 2012 and September 2012.
• Nashik power project is being set up through its subsidiary Indiabulls Realtech Limited. 135MWx5=675 MW and 330×2=660MW making a total of 1335 MW. Total cost Rs 6048 crs, coal linkage allocated and debt tied up. 5 units of 135 MW each to be commissioned in September 2011 and balance to be commissioned in February 2012.
• Bhaiyathan Project – Super critical technology 660×2=1320 MW. Captive coal mines have been allotted. Debt negotiations are currently on. Commissioning in December 2012 and March 2013.
• Amravati Phase II- Super critical technology 660MWx2=1320MW Commissioning in March 2013 and June 2013.
• Chhattisgarh Power Project – Super critical 660MWx2=1320 MW Land, water and coal yet to be tied up. Expected commissioning in June 2103 and September 2013.

Land has been acquired or allotted in all the four projects. Water has also been allotted/allocated and coal linkage/mines have also been done. On the sale side, 1000MW long term PPA for Amravati Phase I and 65% of power from Bhaiyathan have been signed. The balance would be a mix of short term PPA’s and merchant power.

The above projects would be for a combined capacity of 6615 MW.

The company is developing four hydro power projects in the state of Arunachal Pradesh on the Kameng River. These projects are for 60MW, 30MW, 46MW and 31MW respectively making a total of 167 MW. The company has two projects under evaluation. The first of these is in the state of Jharkhand for 1320MW and the second in the state of Madhya Pradesh for 2640MW.

Demand

The shortage of electricity and the need for the same cannot be emphasized. Maharashtra has been experiencing on an average peak load shortage of 20%. The addition of new generating capacities has been lagging and is way behind schedule. Long term PPA’s are seeing a rising trend and power rates are expected to harden going forward.

Strategy

The company has formed a strategy to locate its plants near to the load centre. The CERC (Central electricity regulatory commission) has vide its notification dated 3rd July 2009 notified new parameters which makes interstate and inter region transmission more expensive. The expected increase in cost per unit is Rs 0.41 for interstate and Rs 0.85 for inter-region. The companies Amravati units are eligible for carbon credits and have received the host country’s approval for the same. A point to be noted however is that the present protocol expires in 2012 and a new international framework will have to be in place before the company really benefits.

Risks

There are concerns which are raised about Chinese equipment and their efficiency. However the same concern exists in the case of Reliance Power and Adani Power. The need for entire power produced to be tied up is no longer a concern simply because of the tremendous shortage and rising demand. The major risk which exists however is the execution risk and completion of projects in time. I believe the discount which is available in valuations is only for the execution risk otherwise there would be no reason why this stock is being offered at a substantial discount to its peers like Adani Power.

Valuations

Book value is a parameter which was used for marketing recent power issues. The book value of Adani Power is Rs 22.6 or its issue price of Rs 100 was at 4.42 times its book. The market cap of Adani Power is Rs 21974 crs. Comparing with IPL the book value is at Rs 27.3 or 1.65 times its book. The market cap is Rs 8994 crs at the top end of the price band of Rs 45. The difference is projects under execution where Adani is executing 9900 MW while IPL is executing 6615 MW. The debt equity ratio for Adani Power is 80 -20 while the same for IPL is 75-25 or simply putting it 4:1 for Adani and 3:1 for IPL.

Conclusion

Adani Power did extremely well during the IPO based on hype which was created for the issue. I believe this a low key issue which will do very well and looking at the attractive price will offer value to investors looking at short term and medium term gains.

Investors should apply for a 20-25% short term gain and a 50% medium term gain expectation. Execution risks are certainly factored into the price.

Sebi Disclaimer: – I intend to subscribe to the issue.