The BSE will be excluding the following scrips from the BSEIPO index with effect from Monday the 14th of December 2009.
Enter company after uncertainty about listing and fair price is automatically discovered.
JSW Energy Limited is tapping the capital markets with an issue to raise upto Rs 2700 crs. The issue opens on Monday and is also offering a discount of Rs 5 per share to retail investors.
The company proposes to set up power plants of 3650 MW for which financial closure has been achieved and a further 7740 MW in the planning and development stage.
| Size of Issue | at lower band 27 cr shares and at higher band 23.5 cr shares |
| QIB | 60% of issue with Anchor investors allotted 4.22 cr shares at Rs 110 per share |
| Non-institutional Portion | 10% of issue |
| Retail investors | 30% of issue |
| Book Running Lead Managers | J M Financial, Kotak Mahindra Capital Company Limited, ICICI Securities, IDFC-SSKI Ltd, J.P.Morgan, SBI Capital Markets Limited, Morgan Stanley, and IDBI Capital |
| Issue Price | Rs 100 – Rs 115 with a discount of Rs 5 per share for retail investors |
| Amount to be raised | upto Rs 2700 crs |
| Market Capitalisation post issue | Rs 16500 crs to Rs 18500 crs approx |
| Issue opening date | Issue opens Monday the 7th of December |
| Issue Closing date | Issue closes Wednesday the 9th of December |
| IPO Grading | IPO grade 4/5 by CARE Limited |
The JSW group is in to various businesses. Currently it has large interests in steel manufacturing, and power business. It has interests in aluminium, cement, infrastructure and software. JSW is a part of the O.P.Jindal group. The present issue is for financing construction and development of identified projects and the 400 KV transmission project and mining venture.
Projects
The company has in generation 995 MW as follows:-
| Barmer | 135 MW |
| Vijayanagar | 860 MW |
The projects under implementation are as follows:-
| Barmer | 1215 MW |
| Jaigarh | 1200 MW |
| Kutehr | 240 MW |
The projects under implementation total 2655 MW and except the hydro project at Kutehr are expected to be commissioned in a phased manner roughly 3140 MW in generation by April 2011. The company has in place necessary coal linkages or imported coal to run these plants. The Jaigarh plant is based on imported coal, while the Barmer plant is based on lignite. Mining for the same is yet to begin and is some time away before it happens. Presently the one plant which has been commissioned in Barmer is being run on imported coal.
The company is also setting up a transmission line in the state of Maharashtra. This would be two 400kv double circuit quad moose transmission lines from the Jaigarh plant in Maharashtra to New Koyna and Karad. These transmission lines are being laid as part of a JV with Maharashtra state where the company has a 74% stake and the state utility company 26%.
JSW energy is into power trading and has also entered into a JV with Toshiba Corporation of Japan for manufacture of steam turbine generation equipment. The company has also entered into mining activity in Rajasthan and a JV with Mahanadi Coal Field Limited for coal miming in Orissa.
Financials
The company has reported a topline of Rs 1326.1 crs for March 2008, Rs 1851.2 crs for March 2009 and Rs 909.4 crs for the half year ended September 2009. The profit after tax for the same period has been Rs 323.4 crs, Rs 279 crs and Rs 269.5 crs respectively. The company has been doing well and has demonstrated its execution skills, its ability to commission projects on schedule and become a formidable player in its area of chosen interest.
Business Strategy
The company has a mix of short term and long term PPA’s (power purchase agreements) in place. The current ratio is 45:55 with short term being 45 and long term being 55. This ensures a steady income flow to the company and takes care of the overheads. The merchant power sale helps in better realisations and also helps in increasing the profits substantially.
Objects of Issue
The objects of the issue are as follows:-
|
Finance construction and development of the identified projects |
Rs 2142.526 crs |
| Repayment of corporate debt | Rs 470.000 crs |
|
General corporate purposes |
X |
Strengths
JSW Energy has demonstrated its execution skills and successful implementation of projects. Even recently one has witnessed quite a bit of controversy over the plant located in Ratnagiri at Jaigarh. I personally took the time out and visited the plant and was impressed with the progress at the site. The company has initiated a number of projects under “CSR” and has been taking care of the community. The 4 X 300 MW project is on schedule and the first 300 MW project is likely to be commissioned on schedule by the end of March April 2010. The adjoining port also has been developed and the jetty is ready to start handling coal well in time before the plant is commissioned.
The company is already running power plants in the JSW Steel plant for over 15 years now and running them very efficiently. Chinese equipment which has been ordered for the Ratnagiri plant is already under operation in Vijayanagar and is running efficiently. The equipment or the performance is not new to the company. The coal linkages are in place for the projects under construction.
Weaknesses
There is a sharp drop in prices of merchant power and this weakness could affect the overall profitability of JSW Energy. Imported coal which forms the basis of the bulk of fuel linkage of JSW Energy is subject to fluctuation and currency movements. Any sharp movement could affect the company adversely and with an almost 50% dependence on merchant power could hurt the company. Currently lignite mining has not begun in Rajasthan. Using imported coal from the port in Gujarat is not only expensive, but also hurts because lignite uses low value coal and therefore the technology also is inferior compared to the other units. The use of imported coal means higher costs and is not beneficial to the company at all.
Merchant power rates are therefore the key to the company’s performance.
Valuations
Based on the current market capitalisation of Rs 16500 to Rs 18500 crs for 3140 MW in 2011 is not cheap by any standards. The fact that three power companies IPO’s since August 2009 are still in the red and investors are unhappy about the negative returns in these offerings. Even heartbreaking has been the fact that while these issues themselves are trading in the negative, broad markets have gained substantially making investment in power companies look ridiculous or unwarranted for.
On like to like basis one could compare JSW Energy to Tata Power who has reported a profit after tax for the first half of 2009-2010 of roughly Rs 936 crs. The company has a substantially higher market cap of roughly Rs 32000 crs, but it is into almost all the activities that JSW Energy is into. It may also be important to note that Tata Power is setting up a mega project of 4000 MW in Mundra and this plant would also be in operation in the next 12-18 months in a phased manner. The total capacity being put up by JSW Energy in the next 18 months with the present generating capacity would be less than Tata Power’s new plant.
Conclusion
The markets at 17100 and 5100 respectively are not cheap at this time. It would therefore make sense not to invest in a power issue at current prices because of two reasons. The first reason is that the sentiment against power companies is extremely poor and the name ‘power’ is today like a bad word in the market place and investment is not forthcoming. Secondly there is a discount on the shares being offered in the grey market. Readers would recall that the company is offering a discount of Rs 5 to retail investors. An application of 900 shares can be made at cut off currently. Assuming full allotment it means that the discount earned by the retail applicant at full allotment would be Rs 5 x 900 shares or Rs 4500. Of this he is prepared to offer half to the buyer and ensure that the applicant has a net profit of Rs 2250 and no risk with listing price. The retail portion of 30% means roughly Rs 810 crs and about 1.75 lakh applications to 2 lakh applications to subscribe the retail portion.
I believe it is a great business, great company but with such a big factor like sentiment and past track record of power issues, one should stay away from current application. It would make better sense to invest or enter into the company after listing so that the three week blackout risk post the closure of issue is eliminated and secondly the bad sentiment is taken care of.
In conclusion, I believe it makes sense to currently stay away and enter the share on listing day or in the week of listing.
Godrej Properties Limited (GPL) is tapping the capital markets with an issue to raise between Rs 462.057 crs and Rs 499.776 crs next week. The promoters of the company are M/s Godrej and Boyce Manufacturing Company Limited and M/s Godrej industries Limited.
| Size of Issue | 94,29,750 shares |
| QIB | 56,57,850 of which Anchor investors may be allotted 16,97,355 shares |
| Non-institutional Portion | 9,42,975 shares |
| Retail investors | 28,28,925 |
| Global Co-ordinators & Book Running Lead Managers | ICICI Securities and Kotak Mahindra Capital Company Limited |
| Book Running Lead Managers | IDFC-SSKI Limited and Nomura Finacial Advisory and Securities (India) Private Limited |
| Issue Price | Rs 490 – Rs 530 |
| Amount to be raised | Rs 462.057 crs to Rs 499.776 crs |
| Market Capitalisation post issue | Rs 3422.65 crs to Rs 3702.05 crs |
| Issue opening date | Issue opens Wednesday the 9th of December |
| Issue Closing date | Issue closes Friday the 11th of December |
| IPO Grading | IPO grade 4/5 by ICRA Limited |
Business
GPL is one of the leading real estate development companies in India. It develops residential, commercial and township developments. GPL entered into its first project in 1991 and initially concentrated in Mumbai Metropolitan. It then expanded to Pune, Bengaluru, Kolkatta, Hyderabad, Ahmedabad, Mangalore, Chandigarh, Chennai and Kochi. The company as of 31st October 2009 has completed a total of 23 projects comprising of 7 commercial and 16 residential aggregating approximately 5.13 million square feet (msf) of developable area.
Currently the company has land reserves of 391.04 acres aggregating to approximately 82.74 msf of developable area and 50.21 msf of saleable area. The company has also entered into memoranda of understanding with certain Godrej group companies for developing land owned by them. This includes 75 acres in Mohali (Chandigarh) and 10 acres in Hyderabad with Godrej and Boyce Manufacturing Company and 100 acres in Bengaluru with Godrej Agrovet.
The company has paid a sum of Rs 391.175 crs and has yet to pay a further sum of Rs 292.649 crs for the 391.04 acres of land bank that it has.
Unique business model
The company uses the “joint development model” for developing properties which entails entering into a development agreement with the owner of the land. An advance amount is paid at the time of executing the agreement. A typical agreement states that the land owner is entitled as compensation, to a share in the developed property or a share of the revenues generated from the sale of the developed property or a combination of both after adjusting the advance amount paid earlier. This business model ensures that there are virtually no litigations regarding land, agriculture or non agriculture status and so on. This model de-risks the exposure to land prices significantly, is extremely beneficial in times of economic downturn and provides economic stability.
Objects of the Issue
The company proposes to raise between Rs 462 crs and Rs 499 crs.
The objects of the issue are as follows:-
| Acquisition of land development rights for our forthcoming projects | 203 crs |
| Construction of our forthcoming project | 75 crs |
| Repayment of loans | 172 crs |
|
General Corporate Purposes |
X |
Strengths
Godrej is an established brand name and clearly it is a key strength for the company. The name and group have been in existence now for 112 years and it helps in credibility especially in an industry where there are the most number of concerns. GPL has land reserves in strategic locations in growing cities such as Mumbai, Ahmedabad, Bengaluru and Pune. The company has a unique business model of joint development which is a win-win situation for all concerned and finally its execution methodology which uses IT software and systems and working with service providers which enable access third party design, project management and construction expertise.
Financials
GPL reported revenues of Rs 25.25 crs for the year ended 31st March 2009 and Rs 227.51 crs for the year ended 31st March 2008. The profit after tax was Rs 75.63 crs and Rs 75.02 crs respectively. For the half year ended 30th September 2009 the revenues were Rs 115.12 crs and the profit after tax was Rs 47.74 crs. Based on the March 09 results the EPS on the old capital of Rs 604.20 crs was Rs 12.51 while for the half year ended 30th September 2009 was Rs 7.90. If one were to annualise the same the EPS would be Rs 15.8 per share on old capital. Using the same earnings if one were to annualise half year profits and look at fully diluted earnings the same would be Rs 13.67 per share. Taking this EPS the valuation of the company on fully diluted earnings of first half annualised is about 35.85 times at the lower end of the price band and 38.77 times at the higher price band.
GPL follows ‘percentage of completion method’ of revenue recognition.
Investment Rationale
Based on current earnings there is nothing much to talk about. The question that then comes to mind is then why? I believe the story is in the opportunity. One agrees that the present estimated saleable area is approximately 50.21 msf and out of the above roughly 27.38 msf is in Ahmedabad. Very clearly Ahmedabad is a probably 8-12 year story and is going to be a township having schools, hospitals, commercial, shopping malls and what not. If one were to exclude this from the development it would be quite prudent to believe that the company GPL is likely to develop anything between 9 to 11 msf in the next three years. Comparing this with the 5.13 msf done in the last 17 years we are talking of a eleven times jump in development per year. Simply put against the average 0.30 msf over the last 17 years we are now talking of roughly 3.3msf per year.These estimates would be based on a conservative basis, simply because GPL hires best in class contractors for its projects. This ensures quality, timely delivery and scalability. The profit or EPS from this could be calculated and assumed by any investor.
The second big trigger for the company is the green forest in the middle of Mumbai known as Vikhroli. This is a development opportunity for the company and the founders or promoters of the company. GPL is the developer or development arm of the group and though there is no written agreement or memorandum to that effect it would be prudent to assume that any development done for sale as residential is likely to be developed by GPL.
The third trigger is the development agreements with the group companies for 185 acres in Chandigarh, Bengaluru and Hyderabad.
Conclusion
The business looks interesting, having the potential and above all coming from a group with corporate governance in place. They are in a business which is competitive, but has immense requirements. With ‘affordable’ housing being the need of the hour and huge requirement, there would be no dearth of business. There is money for investors who hold the stock for the next few months at the bare minimum. Longer term investors will make better money. If however anyone expects a huge listing gain, one should refrain from applying because that may or may not happen.
Apply for medium term gains.
SEBI disclaimer: – I intend to apply for the above issue.
