Indiabulls in Mou with Govt. of Jharkhand for Power Project

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Indiabulls in Mou with Govt. of Jharkhand for Power Project Powered By Docstoc
					   October 12, 2009 | Power

IPO Review
                                                                                                         Issue Opens                  Issue Close
Indiabulls Power                                                                                          12-10-2009                  15-10-2009

  Discounted valuation for newcomer in power…                                                                           Price Band
  Indiabulls Power (IBPL) is the flagship power company of the Indiabulls                                                Rs. 40-45
  group. It was incorporated in October 2007 and will develop and operate
  several power generation projects with a planned capacity of 6,615 MW by
  FY13E. Three projects with 3,975 MW of capacity are at advanced stages of                                          SUBSCRIBE
  implementation. IBPL has achieved majority of the regulatory approvals for
  the three projects. They are expected to commence operations by FY12E. The
  company intends to enter into long-term power purchase agreement for 75-
  80% of the overall installed capacity and trade the remaining 20-25% of the                         Analyst’s Name
  power capacity through the merchant route.                                                          Jitesh Bhanot
  Executing five projects with installed capacity of 6,615 MW by FY13E                      
  IBPL is executing five projects with an overall capacity of 6,615 MW. Out of this
  60% of the planned capacity will come up in the western region. Of this, 3,975
  MW is in advanced stages of implementation. From this, equipment has              Fact sheet
  already been ordered for 2,640 MW. Fuel supply for projects in advanced
                                                                                                                                                 Post issue
  stages of implementation is assured by coal linkages and captive mining.
                                                                                                                            Pre        Post      (including
  Projects strategically located in western region with a merchant play                                                   issue       issue          GSO*)
                                                                                                      Equity (no of
  IBPL has ~60% of its plants located in the western region, which is facing                          shares in cr)       165.9       200.0          205.0
  significant demand-supply mismatch. The normal demand-supply deficit                                Promoters (%)       71.43       59.23          57.76
  stands at 12.5% while the peak demand-supply deficit stands at 15.4% for                            Others (%)          27.86       23.69          23.10
  April-August 2009. The deficit scenario in the west would help the company in                       Public (%)           0.00       16.98          19.04
  trading surplus power through the merchant route.                                                  * Green shoe option
  Concerns                                                                                           Issue details
       Execution risk is a major risk as the company has no track record in the
       power segment                                                                                  Issue size (Rs crore)                1359.2-1529.1
       Owing to the long gestation period for the power generation company,                           No of shares on offer (cr)                   33.98
       operational profitability will start only after 2012                                           QIB (60%)                                    20.38
       IBPL has entered into offtake agreements with only 28% of the capacity                         Non institutional (10%)                       3.39
       tied under the long-term power purchase agreements                                             Retail (30%)                                 10.19
                                                                                                      Minimum lot size                        150 shares
  Valuations                                                                                          Market cap (post issue) (excl
  At the lower band of the pricing range, IBPL without taking the green shoe                          GSO) (Rs cr)                             8,005-9,005
  option would trade at 2.2x June 2009 book value (BV). On the higher band, it
                                                                                                     Comparison with other companies
  would trade at a book value of 2.3x June 2009 BV. Peers like Adani Power are
  trading at a multiple of 3.9x BV while Reliance Power is trading at a multiple of                  Stock return (%)          3M          6M         12M
  2.8x BV. Taking into account the discounted valuation to peers, we assign                          Reliance Power            13.3       30.1        29.1
  SUBSCRIBE to the issue for listing gains.                                                          Lanco Infratech           47.5      152.1       201.0

  Exhibit 1: Project details in the nutshell
                              Owner- Expected Tied under Merchant Capex (Rs          Equity   Debt                      Expected Financial
   Projects                  ship(%)       (MW) PPA (MW)            (MW)       Cr)     (%)     (%) Source of fuel           COD Closure
   Capacities under development - Advanced stages of implementation
   Amravati I                  100.0       1,320         1,000       320    6,888    25.0     75.0      Coal Linkage Jun 2012            Yes
   Nashik Power                100.0       1,335            NA        NA    6,048    25.0     75.0      Coal Linkage Sep 2011             No
   Bhaiyathan                   68.0       1,320           858       462    6,796    25.0     75.0     Captive mines Dec 2012             No
   Capacities under development
   Amravati II                 100.0       1,320            NA        NA    5,587     25.0    75.0       Coal Linkage Mar 2013            No
   Chattisgarh power           100.0       1,320            NA        NA    5,734     25.0    75.0       Coal Linkage Jun 2013            No
   Total (a+b)                            6,615                -         - 31,052
  Source: Research, Company | Equity Research

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Company Background
                                                                                                         Objects of the issue
Indiabulls Power Ltd (IBPL) is a relatively new company in the power generation
sector and is planning to tap opportunities offered by the Indian power sector.
Promoters Indiabulls Real Estate incorporated the company in October 2007.                                    Finance the construction of
IBPL is developing 6,615 MW of installed capacity scheduled to commence                                       Amravati I - 1,320 MW
operations in FY12E. In addition, the company is also planning to develop four
hydro-based power projects with a combined installed capacity of 167 MW.                                      Part-finance construction of
IBPL has also expressed that there will be no need for further dilution of stake                              Nashik Project- 1,335 MW
for executing 6,615 MW post the IPO. The company also intends to sell long-
term PPAs for about 75-80% of the proposed capacity. IBPL expects to sell the                                 General corporate purpose
remaining power on a merchant basis. The company intends to enter into long-
term PPA under the Case 1 route.
Business model
The business model of IBPL is likely to be similar to Adani Power. It operates
under the high risk and high reward category. IBPL had opted for Case I bids
under which all operational risks are assumed by the company on the downside
and all efficiencies achieved there, hence, would translate into additional profits
for the company when compared to the conventional regulated model where
the returns are linked to investments rather than efficiencies. The company is
yet to enter into power purchase agreements for 72% of the capacity. With
rates improving in the power market for long term PPAs the company will be
able to negotiate offtake agreements at a premium to the conventional
regulated model.
Additionally, the company would relish the higher margins from the merchant
capacity. This should offer significant support to the profitability of the company                       Option to sell 20-25% of the installed
as domestic coal would ensure a cost advantage to IBPL compared to players                                capacity under the merchant route
operating on imported fuel. A significant demand-supply mismatch has led to                               will offer significant support to
merchant tariff rates climbing to as high as Rs 14 over the past quarter. It is right                     operating profitability.
now capped at Rs 8. However, rates are highly volatile and may not sustain at
such high levels over the longer duration. We believe merchant tariff rates are
likely to stabilise in the range of Rs 4-4.5 over the longer time frame of the next
five years.
Exhibit 2: Company description
                                                                       Indiabulls Power Ltd

                                100%                                               100%                                   100%

         Amravati I         Nashik power           Amravati II *
                                                                            Bhaiyathan (1,320 M)                     Chattisgarh Power
        (1,320 MW)           (1,335 MW)             (1,320MW)
                                                                                 2x660 MW                           project (1,320 MW)
          (2x660)          (5x135+2x330)              (2x660)
                                                                                                                        2x660 MW

                                                                       Captive mines allocated with a
   Coal linkage with western coalfields and south eastern coalfields         reserve of 350MT
            * Applied with the Ministry of Coal for linkages            with a calorific value of 4700               Fuel supply under
                                                                                     Kcal                              consideration


Source: DRHP, Research

                                                                                                          2 | Page
Investment Rationale

Focusing on the implementation of 6,615 MW projects under development
IBPL is executing five projects under execution with an installed capacity of
6,615 MW. Three projects with an installed capacity of 3,975 MW are under
advanced stages of implementation and a majority of the regulatory approvals                                                                                              Significant expansion plans of 6,615
are in place.                                                                                                                                                             MW with 20-25% of installed
                                                                                                                                                                          capacity reserved for merchant play
                                                                                                                                                                          makes it an interesting bet in the
Nearly 1,300 MW to 1,600 MW of capacity dedicated to merchant market                                                                                                      power sector
IBPL intends to keep 20-25% of the installed capacity to be sold under the
merchant market. With a significant portion of the capacity expected to be sold
under the merchant market, the fortunes of the company will be linked to the
merchant market outlook over the next decade. We believe the company will be
able to realise an average merchant tariff of Rs 4 for the next five years.

Allocation of captive mines a valuable asset
IBPL has allocated captive mining blocks at Gidhimuri & Puturia villages in
                                                                                                                                                                          Captive coal mine offers significant
Korba district. The mines are expected to have geological reserves of 350 MT.                                                                                             value and improves the visibility for
The coal is believed to have a calorific value of ~4,700 kcal. The mines are able                                                                                         increasing the capacity of Bhaiyathan
to support operations of 3,000 MW for 25 years. We believe the coal block will                                                                                            project from the present 1,320 MW
offer significant opportunity for increasing the scale of Bhaiyathan plant in

Deficit scenario in western region — the industrial belt
In the backdrop of the deficit scenario prevalent in target markets, it gives the
company an excellent opportunity to capitalise on the needs within the
industrial belt of the western region. The deficiency in Maharashtra has
continuously remained higher than the India average deficit situation. Nearly
60% of the planned expansions fall in states with huge deficits as seen from the
deficit scenario in Exhibit 3.

Exhibit 3: Power deficit scenario in the West

                                       Energy - Deficit                                                                                                 Peak - Deficit
                                                                                               Till Aug                                                                                                      Till Aug
           2005        2006               2007           2008                   2009            2009                   2005            2006                2007             2008              2009            2009
    1.0                                                                                                         0.0

   -4.0                                                                                                        -5.0
















  -19.0                                                                                                       -25.0
  -24.0                              Maharashtra                       India                                  -30.0                                   Maharashtra                    India

Source: CEA, Research

                                                                                                                                                                   3 | Page
Large pipeline of projects at the planning stage
IBPL has 4,127 MW of projects in the MOU stage. This will continue to offer
growth opportunities for the company.
Exhibit 4: Description of projects at the MOU stage
Projects                    Ownership(%)        Expected (MW)    Free Power   Expected COD   Financial Closure
Capacities under Memorandum of understanding - Hydro
Tharang Warang Hydro               100.0                  30.0          12             NA                No
Pichang Hydro                      100.0                  31.0          12             NA                No
Sepla hydro electric               100.0                  46.0          12             NA                No
Phanchung hydro                    100.0                  60.0          12             NA                No
Total                                                    167.0
Capacities under Memorandum of understanding - Coal
Chindwara                          100.0               2,640.0          NA             NA                No
Govt of Jharkhand                  100.0               1,320.0          NA             NA                No
Total                                                 3,960.0

Source: Company, Research

Appreciating rupee to favour players developing capacities using Chinese equipment
IBPL has so far placed orders only for two projects with an overall capacity of                      The usage of Chinese equipment will
2,640 MW. With the rupee appreciating against the dollar, the outcome is                             receive additional impetus with the
expected to favour companies that are operating on the model of importing                            appreciating rupee and improve the
Chinese equipment. This will offer additional opportunities to save financial                        prospects for Indiabulls Power
costs for undertaking the overall project cost.

                                                                                                4 | Page
Key concerns:

No track record of operation in generation space and execution risk
Lack of operating history combined with absence of operational projects poses
the biggest risk for the company. The company has no track record for showing
the operating performance of their projects under development. Execution and
successful operations of the plant poses one of the significant risks.

Exposed to volatility of merchant tariff rates
A sizeable portfolio of the expected capacity ~20-25% of 6,615 MW is likely to
be negotiated under the merchant route. The merchant power market is still in          Fortunes of the company are linked to
nascent stages and realisation under such mechanism can tend to be very                the rates that are likely to prevail in
                                                                                       the merchant market in FY13E and
volatile. The regulator has already imposed a cap of Rs 8 on the merchant tariff.
This indicates the reluctance of the regulator to permit such a high cost of
power, which was prevalent in the merchant market. Rate of power in the short-
term category on the leading energy exchange (IEX) over the past year has
been ranging from Rs 2 to Rs 15 per Kwh.

Untied Power Purchase Agreement (PPA) exposes the company to uncertainty
                                                                                       IBPL is still to finalise PPA for long-
A total of 72% of the overall capacity is still untied, which is exposed to            term power. This exposes it to
uncertainty of rates that the company will be able to negotiate with several           significant uncertainty with respect to
SEBs under case I bids.                                                                realisation per unit

Acquiring remaining approvals for projects
IBPL may not succeed in achieving all the required approvals for their
expansion plans. Partial land acquisition has been achieved at Bhaiyathan
project. The company is seeking to acquire another 700 acres for ash dyke and
colony. The company is still to acquire the land for its 1,320 MW Chhattisgarh

Exposed to foreign exchange variations
Depreciation of rupee against the foreign currency may have an adverse effect
on the capital expenditure to be incurred by the company. With the business
model of using imported equipment, the company may get impacted due to
adverse foreign currency movement.

Usage of Chinese equipment
The company has been banking on the usage of Chinese equipment for their
projects. The Chinese equipment does not have a praiseworthy track record in
India. If the equipment fails to deliver on the performance at the desired level,
then it may have a significant impact on the profitability of IBPL.

Huge lead distance of generation plants from fuel source
Amravati power project & Nashik power project are both located at ~ 500 km
and 900 km, respectively from the fuel source. Considering the fact that the fuel
cost of the project is not a pass through the company will be incurring an
additional cost for transportation. The additional cost of Rs 0.30 per Kwh for the
Amravati project and Rs 0.60 per Kwh for the Nashik project is expected if we
assume a GCV of 3300 Kcal for coal.

                                                                                     5 | Page
Financial Summary

Comments on financials have been excluded intentionally as the company has
no operational assets as of March 31, 2009.

                                                                             6 | Page

At the upper band of the pricing range, IBPL is trading at a post issue Book
Value of 2.3x. IBPL is available at a discount to peers like Reliance Power, which
is trading at a multiple of 2.8x BV and Adani Power that is trading at a multiple
of 3.9x BV. However, we believe that with a slightly lesser aggression in respect
of capacity addition the company is likely to trade at a marginal discount to
bigger players.

The company is also expected to trade at an enterprise value per megawatt of
                                                                                      With a post issue price to book value
Rs 4.9 crore in FY13 after taking into account the commissioning of 6,615 MW
                                                                                      of 2.3x and an EV per MW of Rs 4.9
of projects. On a like-to-like basis it is inexpensive when compared with             crore on FY13E capacity, the
Reliance Power, which is expected to commission close to 5,600 MW of                  company looks relatively cheaper
capacity by FY13 and commands an enterprise value per megawatt of Rs 9.4              than peers like Reliance Power and
crore. The same is true for Adani Power that would command an enterprise              Adani Power
value per megawatt of Rs 6.7 crore in FY13 after commissioning 6,600 MW of

We are not comparing the company with public sector veterans like NTPC and
Neyveli Lignite as the risk reward metric for the company is significantly
different from public sector companies.

At the lower band of the pricing range, IBPL without taking the green shoe
option would trade at 2.2x June 2009 book value (BV). On the higher band it
would trade at a book value of 2.3x June 2009 BV. Peers like Adani Power are
trading at a multiple of 3.9x BV while Reliance Power is trading at a multiple of
2.9x BV. Taking into account the discounted valuation to peers, we advise in
favour of subscribing to the issue for listing gains.

                                                                                     7 | Page
RATING RATIONALE endeavours to provide objective opinions and recommendations. assigns ratings to its stocks according to their notional target price vs. current
market price and then categorises them as Outperformer, Performer, Hold, and
Underperformer. The performance horizon is two years unless specified and the notional target
price is defined as the analysts' valuation for a stock.
Outperformer (OP): 20% or more;
Performer (P): Between 10% and 20%;
Hold (H): +10% return;
Underperformer (U): -10% or more;

Pankaj Pandey                       Head – Research                       

                           Research Desk,
                                    ICICI Securities Limited,
                                    7th Floor, Akruti Centre Point,
                                    MIDC Main Road, Marol Naka
                                    Andheri (East)
                                    Mumbai – 400 093

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