JSW Energy IPO: The company’s operational experience will help

JSW Energy IPO: The company’s operational experience will help

Most IPOs in the power generation sector have been disappointing as far as investor returns go. There was enormous value destruction for Reliance Power’s investors, since the IPO happened at the peak of the boom in end 2007/early 2008. But the IPOs of Indiabulls Power and Adani Power, which happened this year, are also trading below their issue price.

Graphics: Ahmed Raza Khan / Mint

In any case, despite the poor performance of IPOs from the power sector, investor appetite for power stocks is strong. The fact that India has an energy deficit has led to a surge in investment in the sector and financial investors don’t want to be left behind. But it must be noted that merchant power companies form a small proportion of total supply in the market and may hence be able to get away with high profit margins. State-run power generation companies get a regulated tariff. With a number of merchant power companies putting up large capacities under the eleventh five year plan (2007-2012), their share of supply will increase, and this may lead to pressure on the tariffs they can charge, especially from state-run electricity boards.

The fact that the power generation business is a commodity business seems to be ignored in the current euphoria. JSW’s IPO may get easily subscribed especially given its edge of having an operational track record, but investors need to play the power sector carefully.