Mumbai: Adani Power Ltd, a private power producer owned by the Adani Group that has interests from agricultural commodities to shipping, will sell shares starting Tuesday. This offer to sell shares is the biggest initial public offering (IPO) since Reliance Power Ltd raised Rs11,700 crore in February 2008.
Adani Power has set the sale price at Rs90-100, which will net it Rs3,000 crore at the upper end. Analysts suggest that the valuations are a bit demanding at this range.
Anagram Stock Broking Ltd’s best case scenario is Rs90 a share. Motilal Oswal Securities Ltd in a 23 July note, wrote, “We arrive at a pre-money valuation range of Rs68-93 per share. We believe the IPO valuation is demanding and factors in perfect execution.”
Pre-money valuation does not take the cash to be raised in the IPO into account.
Both brokerages arrived at this value by determining the future cash flows of the company.
This is at best, a tricky exercise since it assumes a variety of factors such as capacity utilization, cost of imported coal, power tariffs and so on. Brokerage Noble GP estimates fair value at Rs105 a share, based on the average value assigned by investors to every megawatt of power capacity in listed firms.
Most power stocks have gained sharply since the general election on hopes that the new government will boost infrastructure spending. Since 15 May, the BSE power index has gained 76.3% compared with 26.3% for the benchmark 30-stock Sensex.
Adani’s share sale will be the first of such issues from the power sector. State-owned NHPC Ltd and Indiabulls Power Ltd are planning to sell shares to the public for the first time later this year. Rural Electrification Corp. Ltd, which went public last year, is planning to raise more equity.
According to the Central Electricity Authority, peak-hour power shortage in Indian will grow to 12.6% in March 2010. Adani plans to utilize the money raised from the equity sale to finance power projects in western India. It currently produces 330MW and is planning 6,600MW by 2012.
The key issues that concern analysts include viability of coal supply agreements, total dependence on Chinese equipment vendors, conflicts of interest with other group companies and so on.
For instance, Sharekhan Ltd notes: “There have been significant reports about the quality and poor performance of the Chinese equipment in the country. If the equipment does not operate as required, the financials...could be significantly affected.”
Noble GP quotes the examples of Sterlite Industries India Ltd’s Balco unit and Haryana Power Generation Corp. Ltd’s Yamunanagar unit to drive home this point.
It also raised an issue of conflict of interests within the group. Ventura Power Investment Pvt. Ltd, which owns 3.7% in Adani Power, is also a power producer and might bid for future projects.
While the company has secured 100% of its fuel supply from Indonesia, analysts from Motilal Oswal say “this exposes (Adani) to regulatory and commercial risks”. Some have also raised questions about the long supply chain.
Adani Power is buying the coal from its parent Adani Enterprises Ltd which, in turn, is sourcing it from its fully-owned Indonesian unit PT Adani Global. The Indonesian arm is in turn sourcing it from local licensees.
Still, analysts said the group has a track record of performance such as owning and operating the existing factory and a special economic zone in Gujarat. The promoters have also tied up debt financing for these projects.
“We have visited the plant site and interacted with the senior management,” said Anagram. “We are impressed with the execution track record and financial acumen.”
The offer to sell shares closes on 31 July.