Indiabulls Power Limited (IBP) is a subsidiary of Indiabulls Real Estate Limited. IBPL has been established with the objective to develop, construct and operate power projects.

IBP is currently executing five coal based power projects totalling 6,615 MW generation capacities. The company proposes to set up power plants in Maharashtra (Amravati and Nashik) and Chhattisgarh (Bhaiyathan). The management has indicated that the first power plant would be commissioned at Nashik in 2011-12.

The proceeds of the proposed IPO are expected to part finance the construction and development of the 1,320 MW Amravati Power Project Phase I, fund equity contribution in the company’s wholly owned subsidiary to part finance the construction and development of 1,335 MW Nashik Power Project, apart from general corporate purposes.

Angel Broking evaluates risks involved

IBP is in the process of developing 6,615MW thermal power capacity in Maharashtra and Chattisgarh. However, Revenue visibility over the short to medium term is non-existent, as the projects are expected to commence commercial operations only from September 2011 (assuming there are no delays in completion of the projects, which is highly unlikely considering the inherent nature of business).

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Angel Broking report

CRISIL Research

IBP, being a new entrant in the Power Sector, does not have any operational history, which is a major concern. Further, any delays in the commencement of the projects will impact its cash flows severely. Further, IBP has given the EPC contract for the Amaravati-I & Bhaiyathan Projects to its own subsidiary, Elena Power and Infrastructure (EPIL), which also does not have experience in executing EPC works and is a concern in case of timely execution of the projects.

IBP intends to add close to 25% of its upcoming capacity under Merchant basis to maximise profits on account of the power deficit prevalent in the country. This move of the company, we believe, will not be highly beneficial as around 10,000MW of Merchant-based power plants is expected to be added during the Eleventh Plan, translating to 7-8x the existing capacity at the end of the Plan. Thus, by FY2013, when some of IBP’s plants get fully operational, we expect Merchant power tariffs in the country to stabilise at much lower levels of Rs4.5 per unit than the current average prevailing rates, thereby not providing much Profit potential for the company.

Outlook and Valuation

Analysts at Angel Broking house believe that IBP pales in comparison with other players in the power pack, including those which are expected to be listed shortly, due to its non-existent operational history, futuristic project portfolio and the resultant low earnings visibility. They expect IBP would have operating assets in place only towards FY2013 and FY2014.

The IPO is expensive compared to the company’s domestic peers, NTPC, R-power and Adani Power, which have relatively strong revenue visibility and operational assets and higher return ratios until FY2012. Moreover, earlier there were few investable options in the power space, but there are more options available now for investors in the sector, which are at more attractive valuations than IBP.

The IPO is available at 2.1x and 2.4x P/BV on the lower and upper price bands, respectively . Angel Broking’s DCF-based fair value works out to Rs38/share and recommends an AVOID on the IPO.

CRISIL Research has graded the IPO three on five (3/5), which in CRISIL’s view reflect the current power deficit scenario together with the outlook for sustained domestic economic growth presents a positive outlook for the power sector.

However, Sykes & Ray Equities finds it difficult to evaluate the company in terms of its earnings and financials.