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.

Project

The project being constructed envisages the building of India’s largest dry dock and amongst the largest in the world. The dimensions of the same are 662 mts long and 65 mts wide. This dry dock can accommodate a VLCC (very large crude carrier) as well. The company has installed/is installing two large Goliath cranes each having a lifting capacity of 600 tons, including fit out berths. Alongside the dry dock, the company has a wet dock which could be used for ship repairing as well. The location of the shipyard is strategically located in Gujrat and ideally situated between Dubai and Singapore.

Ship building at PSL is done by building blocks, then mega blocks and then giga blocks. These blocks are very much similar to playing ‘lego’ when we were kids. Steel is cut, fabricated and then assembled. These blocks are then mounted and fabricated to form a mega block and then a giga block is made. On my visit to the shipyard we were explained that a Panamax vessel which has a 75000 ton DWT, weighs roughly 12000 tons. This ship is constructed in 12 giga blocks of roughly 1000-1200 tons each.

The building facility is effectively a modern state of the art assembling, manufacturing engineering unit having various capabilities. It is this capability that the co-promoter Punj Lloyd would like to exploit going forward. The company has the capability of making off-shore vessels which are used in oil exploration as well as defence related ships for the Indian Navy and coast guard. The company is in the process of completing its assessment of facilities for clearance of pre-requisites before it can bid for such enquiries. 

The shipyard site is an EOU (export oriented unit). The fabrication and block assembly facilities are set up in the company’s SEZ unit which is owned by its subsidiary E Complex with whom the company has a long term lease agreement. The entire shipyard other than the offshore yard would be ready in the next couple of months and the first vessel is to be delivered in April 2009. 

Order Book

The company has a healthy order book of roughly Rs 4500 crs which consists of 22 Panamax vessels from two overseas shipping companies valued at roughly Rs 3900 crs and a notification of award of contract from ONGC of 12 OSV’s for about Rs 550 crs.  Of the order for 22 Panamax vessels, the company is in discussion for 8 of such vessels and is engaged in arbitration for 4 such vessels which means that there is a firm order for 12 vessels and there is discussion/arbitration for 10 vessels. The ONGC order is a fixed price contract which does not allow for any escalation of contract price on any ground whatsoever. It is important to mention that the 22 Panamax vessels were all contracted before 14th August 2007 and are therefore eligible for a 30% subsidy from the government of India.

Ship building is a cyclical industry and is subject to wild fluctuations based on the economic cycle and the oil exploration industry based on the oil prices. There is widespread concern and almost every country wants to secure its energy security and has therefore increased the oil exploration efforts. In India also the success in finding oil in deep exploration blocks in the Krishna Godavari basin and in the Barmer oil fields in Rajasthan has increased the activity in these fields and also the need for more equipment.

The company having the potential and the capability to manufacture would be able to leverage on the expertise of its promoter and co-promoter in obtaining the necessary orders. The company has a technological tie up with M/s SembCorp Marine of Singapore.  

Valuation

The company has commenced commercial production from 1st April 2009 and as such there is no past performance to talk about. Revenue recognition is on completion method basis and there would be some revenue in the current year ending March 2010. With the first ship due for delivery only in April 2010, any meaningful revenue would only accrue in the financial year ending March 2011. With no revenue to talk about, EPS and therefore PE become redundant to talk about when one looks at valuation. The sheer size of the project makes any comparison with listed entities like ABG Shipyard and Bharti Shipyard unrealistic and improper. The government shipyards are un listed and therefore are again not comparable.

A correct and meaningful comparison can only be made once substantial revenue numbers are available and once clarity on a) the under negotiation orders and b) defence orders visibility becomes available. In the absence of any such clarity or visibility, there would always be risks associated with the revenue and also with the execution of the project.   

Promoters and their holding

The promoters of the company are the Gandhi brothers with a stake of 23.1% who have in the past promoted and sold Pipavav Port and the Mumbai SEZ project to the Mukesh Ambani group. Even in the case of PSL the promoters have sold to private equity investors and financial institutions a little over 54% of the pre-ipo equity. They inducted a co-promoter in the form of the Punj Lloyd group who has 22.3% shareholding. Post IPO this holding would get further diluted with the Gandhi brothers having 20.1% and Punj Lloyd having 19.4%.

The company has marquee investors in the form of Trinity Capital, 2iCapital, New York Life, Blackstone Asia Advisors amongst the FII’s and Indian investors in the form of IL&FS, UTI, IDBI and Exim bank amongst others.

The company’s ship building yard which is also a manufacturing, fabricating and assembling unit for various types of plant and machinery, is a state of the art facility and can be used for various end uses. No doubt the plant would be consistently operating and would be able to weather any cyclical downturns which would occur over time. However at the current moment of time the issue looks very expensive based on present conditions and the fact that the first full year of operation would be 2010-2011 and probably it would be only in 2011-2012 that the full potential of the plant/facility is realised

Risks

Expertise in ship-building is limited of the promoters. The company is yet to start delivery of the ships and the first one is expected only in April 2010. Of the total 22 Panamax vessels as many as 12 are under negotiation/arbitration and there could be delay in execution of the same orders. The limited experience in execution and cyclicality of the business could lead to delays. There is every possibility that there would be further issue of equity thus diluting the stake of those entering the company currently as shareholders. 

Conclusion

Considering all the above it appears that the book built price of band of Rs 55-60 is tilted against the investor, and even though there maybe some listing gains considering the small size of the issue of just about Rs 500 crs, I believe it makes sense to avoid the issue. It may make sense to buy the company post listing or when revenues and order book become more visible. Currently markets have also run up quite a bit with the benchmark indices having more than doubled over the last six months.

If however any investment is to be made with a minimum of three years horizon, the same may be done with a clear understanding that if markets correct 15 to 20% in the future this share could be available cheaper than the current price band

The hydrocarbon industry in India is highly regulated and we have regulations, price controls, subsidies etc. The biggest burden on the industry is the unrealistic price at which kerosene and LPG is sold to the consumer. The resultant loss or under-recoveries is split three-way in a formula which has basically been ad-hoc and revised from time to time by the central government. This burden of subsidy which falls on the PSU units in this sector have affected not only the fortunes of the companies but also to some extent made them weak financially and affected the performance of these companies.

Whenever there is a disinvestment from any such company, the issue of subsidy is always in the forefront and top of the mind of analysts. This time was no exception, but the government was prepared for the same and answered accordingly. The Union Budget for 2009-10 clearly states that no under-recoveries on account of kerosene or LPG will have to be shared by upstream or downstream companies. This will form part of the central budget. This I believe is a certain positive for the exploration industry and will help them expedite the process of energy security for the country. 

Whenever one talks of OIL, ONGC comes to mind. Very clearly ONGC is the big brother of OIL and from the table below it can be seen that by and large ONGC is ten times the size of OIL. Broadly speaking on parameters of efficiency, earnings and performance the similarities are more than striking and one could say that they are identical. In terms of size there is a clear cut difference and ONGC is about ten times in size.

NHPC has just listed a few days back and very clearly the listing of the same was a disaster considering the overwhelming response the issue garnered. HNI’s had invested Rs 35000 crs in an issue where shares worth Rs 580 crs were to be offered to them. There cost of funds was in a range of Rs 6.75 – Rs 7.25 per share and each one of them has either booked a loss or is holding on to a huge loss, hoping that the price improves. In this scenario the question that comes to mind is should one invest in OIL by applying for the issue and if yes at what price?

The price band is Rs 950 -1050. ONGC shares closed at Rs 1157 on the BSE on 2nd September, a premium of roughly 10.19% over the upper price band of OIL. Broadly speaking a large number of people believe that because of size that ONGC has there should be a 9-11% premium that ONGC should enjoy currently over OIL. If that be the case, then pricing of OIL at the upper price band leaves nothing for the investor on the table after listing. The assumption that price of OIL and ONGC will rise post listing is fine but let us understand that ultimately both will move in tandem unless one finds large reserves of oil and or gas and the other makes no progress.  Market players also feel that with the NHPC saga, the government should lower the price and allow investors to make some money. 

This is a catch 22 situation and needs careful attention of all concerned. Reduction or change in price band is not a possibility. Pricing at the lower band is tantamount to accepting the pricing as inappropriate. The only solution or option in my view is something in between. Thomas Bata is very well known and introduced a concept known as “BATA Pricing”. Products in his shop were sold at 99.95 and 199.95 and so on. The lead managers may take a leaf out of BATA and recommend a price which is ‘three digit’ and on listing becomes ‘four digit’ so that investors may make money and some sort of compensation or relief may be offered for NHPC. Secondly there is no loss of face for anybody be it the promoter of the company (in this case the government) or the merchant bankers and finally with a positive gain on listing day for investors, the dampened sentiment revives – something which is very important with the huge pipeline in store.

I believe retail investors should apply at the magical figure of Rs 999, the last three digit price and not at cut-off. My rational is that suppose the issue is substantially oversubscribed and the price fixed is at Rs 1050, the possibility of listing gains seem remote at current market price of ONGC. The loss of interest for a retail investor is Rs 2.85 per share assuming an investment of Rs 999 bearing interest of a fixed deposit of 8% per annum for 13 days. The worst case scenario is that the issue is priced at the highest price and the investor is not allotted anything. In such a case by losing on the interest alone the investor is out and with virtually no listing gains possibility he is saved from a bigger potential loss.

In conclusion I believe the best an investor can do is apply at the recommended price of Rs 999 and expect the promoters to be reasonable in the price discovery  and be considerate to investors looking at the sentiment of the market. 

SEBI disclaimer: I intend to subscribe at the recommended price.  

Listing gains is a term associated with the equity markets. Yes readers you are absolutely correct and I am not wrong either. Here is an opportunity where you can make sure shot listing gains even in a NCD issue. To make things better with the markets being so topsy- turvy and extremely volatile, this is a good time to make some quick but sure money and also take a break from the markets. Let us travel back in history to January 2009 when Tata Capital raised money from the issue of NCD. The stock markets were in a fairly depressed condition and they offered a coupon rate of 11% to 12% depending on the various schemes and options. In July August 2009 Shriram Transport Finance had a similar NCD issue and they offered a coupon rate of between 10.75% and 11.5%.

L&T Finance has very strong parentage and is a wholly owned subsidiary of L&T Capital Holdings Limited, which in turn is a wholly owned subsidiary of Larsen and Toubro Limited. The company has an asset base of 5218.64 crs as on 31st March 2009. The company had a total income of Rs 830 crs with a profit after tax of Rs 99 crs for the year ended March 2009. The net non-performing assets were 2.04% and the returns on assets were at 1.85 %.

The Business

The company’s business is divided into two segments namely corporate finance and retail finance which account for 37% and 63% of the total assets respectively. Under the corporate finance segment, the company is into Leasing, channel Finance, receivables discounting, asset backed term loans and capital market products. Under the retail finance the offerings include Construction Equipment finance, transport equipment finance, rural finance, micro finance and distribution of products such as insurance and mutual funds. The last product is purely a fee based product unlike others which are fund based. L&T Finance is in operation since 1994 and is registered with the Reserve Bank of India as a NBFC. The company is managed by professionals and has people at the top who have been there from the inception of the company adding to its competence and performance.

The offering of non convertible debentures is secured by a first pari passu mortgage on immovable property specified in the Prospectus and an exclusive first charge by way of mortgage on movables being the receivables arising from Construction Equipment, Lease/Hire Purchase/Term Loans, Loan against Securities, etc., as specifically identified from time to time, aggregating up to 1.10 times of the outstanding NCDs, in favour of the Debenture Trustee.

The issue of Tata Capital NCD is trading in a range of Rs 1118-1125 which at the coupon rate of 12% translates into a yield of roughly 8.5%. Two things to be noted in this calculation are that the redemption amount would be the face value which is Rs 1000, hence there would be a loss of Rs 120 over the next three years and secondly there is a call put option which allows the company to buy back the paper at the end of 36 months. Against this L&T Finance is offering a annualized yield of between 9.85 – 9.95% for the 60 month tenure and 10.5% for the 10 year paper. Keeping this in mind I believe L&T Finance paper is likely to trade at a yield of just around 9%. Even as this article is being written, my sources have informed me that the QIB and HNI portion have been oversubscribed on day one itself.

As a sweetener, the company is offering interest of 7% on allotment and 2.5 % on non allotment money. Consider this with liquid funds where the yield hovers between 4 and 5%. I believe this is an excellent opportunity for retail investors to not only earn interest but also capital appreciations (about 5%) and also have their capital secured. The icing on the cake is, this is money on call and gives a fair amount of return.

SEBI Disclaimer: – I have applied for the issue.