One more issue, one more listing day and yet one more disappointment. Very clearly it appears that not only IPO’s in general but power companies IPO’s in particular are a disappointment for all categories of investors. First it was Adani Power, then it was NHPC and now finally it is Indiabulls Power.Issue after issue is turning out to be a disaster for the investing public. Adani Power issued shares at Rs 100 and listed on 20th August 2009, when the BSESENSEX was at 15012. NHPC issued shares at Rs 36 and listed on 1st September when the BSESENSEX was at 15551. The BSESENSEX as of Fridays close is trading at 15896 a gain of 884 points or 5.89% compared to Adani Power’s listing day close and 345 points or 2.22% compared to NHPC’s listing day close. The two stocks are trading lower than issue price with Adani Power at Rs 97.80 a loss of 2.2% and NHPC at Rs 30.50, a loss of 15.28%.

Indiabulls Power was expected to do well and after having received an overwhelming support from Institutional investors where the issue was oversubscribed over 40 times one expected a decent performance. What happened in reality was completely different and unexpected. It appears every issue hitting the market is generally over-priced. Promoters and merchant bankers create some sort of hype in various forms be it advertising, positioning, road shows, reports on the future of the company and attractive incentive schemes to lure investors. The name of the game is get the issue subscribed by all means. The use of the grey market, the scheme where a retail investor can sell his application form at a fixed price are all tools used to attract investors. QIB oversubscription is yet another way of creating hype and interest in the market.

If all this is not enough, and if the issue has not done well, then ‘arrangements’ are made where the issue just gets subscribed and a deal is struck at a substantial discount to the book built price. If all goes well the issue on listing does well, all institutional investors get an exit, other investors are happy and the fixer makes a killing. A few days after the issue is listed the share starts falling and those left holding the baby are left to fend for themselves. In case the issue is not handled well by the fixer the share tanks on the first or second day itself and there is mayhem all around. We have seen all of this in the issues which have listed in the last few months and without taking names of the companies would be aware of the companies being referred to.

Let us now come to Friday’s listing of Indiabulls Power Limited. The retail response was muted, the Non-institutional investor lukewarm but the Institutional investor interest was stupendous. With an allotment of a mere 2.5% of shares allotted, it would be reasonable to assume that the share would trade around par value in the worst case scenario. What happened in reality was that for a split second or maybe a few seconds that happened and then the share slipped into a deep fall and though it recovered from the lows, enough damage was done for there to be any meaningful recovery. From the table below the details of traded volume of 27.66 cr shares show that this was almost equal to the shares issued and the delivery figure of 8.68 cr shares were a high percentage of 31.4% of traded volume and 31.2% of issued capital.  

There was decent institutional support from two of them who have together bought 3.78 cr shares or a staggering 45.5% of total shares offered for delivery on day one. The two institutions were HSBC Global Investments Funds Mauritius which bought 2.55 cr shares at an average of Rs 40.08 and JPMSL A/c Copthall Mauritius Investment Limited which bought 1.23 cr shares at an average of 39.68 per share. If we were to assume that these two had not bought, I am not sure where we would have ended the day- probably substantially below the Rs 39.25 and Rs 39.50 where we closed on BSE and NSE respectively. I believe this support helped the price substantially.

Coming to the lessons from these recent IPO’s and their subsequent listings, I am sure that the retail investor has learnt the hard way and even though memory is short lived, the after effects will remain for quite some time. NHPC listing saw OIL India receive poor support and now for PSU divestment of NTPC and REC and some more issues a carrot in the form of discount to retail investors is being talked about. Similarly for each promoter it is probably coming to the markets once in a lifetime, it is for the merchant bankers to realise that the market place is their bread and butter and if they kill the hen that lays the golden egg “the investor” who will help them?

The earlier this is realised by all, this will help the capital markets. In conclusion the disaster which was Indiabulls Power Limited makes me think that the issue was all about short-circuiting the investor with a 4400 volt shock and probably three such shocks in a row in the form of Adani, NHPC and Indiabulls has left not only the investor with a deep hole in his pockets, but has left the primary markets with bigger holes which may not fill up in a hurry.         

The stock opened at Rs 44.95 on the BSE and Rs 45.05 on the NSE respectively. The high on the BSE was Rs 45.50 and the open of Rs 45.05 on the NSE.

The company had issued 33.90 cr shares at Rs 45 and the issue was oversubscribed almost 40 times by QIB’s. Having received an allotment of just 2.5% of their appetite one wonders where they have disappeared and why they are not buying from the market when the share is available 14% cheaper. It may also be mentioned that there is a green shoe option of 15% of the issue size which can be used for price stabilisation.

In the interest of investors and the future of IPO’s I believe it is time promoters and merchant bankers did their bit to protect the long term interest of investors and the capital markets.

Mega power IPO’s which are in the pipeline like JSW Energy limited and JP Power would also be keenly watching the performance of this issue.

Allotment of shares and the crediting of shares into demat accounts of successful applicants has begun yesterday. The shares are likely to be listed next week between the 2nd and 4th of November.

The company had come out with its IPO in the price band of Rs 40-45 and the issue was for 33.98 cr shares. The company had made an allocation of 6.11 cr shares at Rs 45 to anchor investors prior to the public offering of shares.

The response overall is better than Adani Power which had a total subscription of 21.64 times. The HNI category in Adani Power was oversubscribed 8.62 times while the retail was 2.96 times. The QIB was 39.47 times. There were a couple of differences between the two issues. Firstly there was a lot of hype created and generated during the issue of Adani Power. This time around there was none whatsoever. The issue of Indiabulls Power came and went. Secondly investors were expecting to make huge money in Adani Power post listing which did not materialise. As a result of this failure, the response this time from HNI’s and retail is muted. Probably this lack of expectation will make the difference and of course the fact that the issue is reasonably priced.

This muted response from the HNI and retail will be the icing on the cake for this issue. Readers would recall my view on this company in my issue analysis where I had stated that this issue is attractively priced and far cheaper than Adani Power. The stock of Adani Power which listed on 20th August has been trading in a narrow range around the issue price of Rs 100. The high in about two months of trading has been Rs 107.90 made on listing day and the low Rs 97.25. The stock closed at Rs 100.15 yesterday. It may be of interest that in the same period the BSESENSEX has moved from 15012 to 17195, a gain of 2183 points or 14.54%.

It may also be relevant to look at the issue of NHPC which was issued at Rs 36 and listed on 1st September. The stock made a high of Rs 39.75 on listing day and a low of Rs 32.45 yesterday. The share closed for trading at Rs 33.50 yesterday.

Looking at this scenario, I am of the firm belief that investors who have reposed faith by subscribing to the IPO of Indiabulls Power Limited will make money in this issue.

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.

The list is impressive and the response received was encouraging. This augurs well for the public issue which opens on Monday the 12th October 2009. The issue size which was earlier 33.98 cr shares has now reduced to 27.8636 cr shares.

The QIB portion is for 20.388 cr shares and the company has an option to allot up to 30% of the QIB portion to Anchor Investors. This portion to Anchor investors comes with a lock in condition of 30 days from date of listing and Adani Power was the first company to allot shares to anchor Investors. Readers will recall that Indiabulls Power Limited post its DRHP filing had allotted shares to a number of domestic investors as part of its Pre-IPO allotment, but the same had to be subsequently cancelled as the company had not filed for such allotment in the draft document. Pre-IPO allotment comes with a lock in condition of one year from the listing of the shares. The price at which the IBPL placement was done was Rs 43.50.

Considering the above it would be fair to assume that investors in IBPL who were allotted shares in the Pre-IPO will come forward and become anchor investors of the company. The total number of shares to be offered in this allotment would be 6.12 cr shares. Assuming the allotment is done at the top end of the price band of Rs 45 it would raise approximately Rs 275 crs. The above allotment would be done on Friday the 9th of October 2009. The successful completion of the allotment to anchor investors would lead the way to a successful IPO as well.