Long-term play

Many companies are harping on the growing demand for power in the country. In this light, several companies have announced big plans to set up power generation capacity; many have also raised the capital to fund their plans. Among new entrants is Indiabulls Power, a part of the Indiabulls group and a subsidiary of Indiabulls Real Estate which is coming out with a Rs 1562.80-1,758 crore IPO.

Track record
The Indiabulls group, which started with financial services and later forayed into real estate, took its first steps in the power sector during 2007 through its subsidiary, Indiabulls Power. So far, the group has delivered value for the investors. For instance, during 2004, Indiabulls Financial Services raised funds through an IPO at Rs 19 per share. At a later date, its real estate business was demerged.

Today, the combined value of both the companies works out to about Rs 550 per share. While this reflects that the group has created value, it has also executed major real estate projects indicating its execution capabilities in the business. In case of Indiabulls Power, its ability to sustain its past track record would be under test.

State of affairs
The company is setting up huge power generation capacities, for which it does not have prior experience. Thus, execution is a key concern. On the positive side, considering that three of its five projects have received the major regulatory approvals and have tied-up for required resources such as equipment, mines, land and water, the company seems to be in a reasonable position to execute these projects on time. Additionally, the company has put in place a managerial team with good experience in the power sector, which provides some comfort.

While the company proposes to build power generation capacities totalling 6,615 mw over the next 4-5 years, as of now, it does not have any. So far, it has achieved financial closure for two projects (Amravati Phase-1 and Nashik), while for the third projects (Bhaiyathan) it claims that the financial institutions have under-written a major part. These three projects which are at the advance stage of development, should be among the first ones to come on stream.

Its first project will be commissioned by September 2011 and hence, expect revenues to reflect only in the FY12. Although the company will not be generating any revenues and cash-flow in the medium-term, analysts believe that it might generate some revenues from mining activities as it gradually ramps up its captive mines. For its Bhaiyathan power project in Chhattisgarh which will be operational by December 2012, the company will require about 5 million tonne of coal every year. However, the company has been allotted mines with about 315 million tonne of coal reserves and mining activity is expected to start before the power project is commissioned, thus leading to surplus coal production in the interim.
 

PROJECT PIPELINE
in Rs crore	Amravati

Nashik
FY09 Bhaiyathan
Q1FY10 Chhattisgarh FY09Q1FY10 Capacity (mw)Phase 1 - 1,320Phase 2 - 1,3201,3351,3201,320 Equipment statusTo EPIL SEPCOTo be finalisedTo be finalisedCNTICZJ ChinaTo be finalised LandAllotted 1,350 acresAlloted and
incl in phase 1Recd 1,000 acres
on lease from IBRELAlloted 700 acresTo be acquired WaterGiven up to 240 mldSame as Amravati-1Alloted by NMC50 mln Cub mtrTo be tied up FuelMines allotedApplied to CEAGranted by MoCCaptive mines of
349.51 Mln tonneUnder consideration PPAWith TPTCL for 1000To be finalisedTo be finalised65% to CSEBTo be finalised StatusUnit-I in June 2012
and fully on Sept 2012First by March 2013,
and full in June 2013Five units by Sep 2011,
commercial by 2012Unit-I by Dec 2012.
Full by March 2013Unit-1 June 2013
commercial by Sep 2013 Cost6,8885,5876,0486,7965,734 Cost/MW5.224.234.535.154.34 Financial closureCompletedYet to be tied upCompletedUnderwrittenYet to be tied up Source: Company

Off-take visibility
The company intends to sell about 75-80 per cent of the power generated through the long-term power purchase agreements (PPA), with the balance to be sold as merchant power which currently sells at a higher rate of over Rs 3-4 per unit. It has tied up for 1,000 mw, which will be generated from Amravati phase-1 project, for supply to Tata Power Trading Company.

Additionally, it has tied-up for sale of 65 per cent of its Bhaiyathan power generation capacity with Chhattisgarh Electricity Board. “However, for Bhaiyathan project PPA has been signed at a levelised tariff of Re 0.81 per unit, which is below the cost of generation which the company seeks to cover up through merchant sales,” says Crisil Research in its IPO grading note. For the rest of the projects the off-take agreements are yet to be tied up.

The company's focus to set up its power plants mainly in the western region is considered to be a relatively good strategy as the region has the highest power deficit of about 16 per cent, with peak power deficit at 19 per cent. Despite new capacities, the shortage will still be significant and thus, provide reasonable visibility in terms of demand as well as better merchant power tariffs. Being close to the load centre will help it curb transmission costs.
 

HIGH VOLTAGE
	CMP (Rs)	Book value (Rs)	P/BV (x)	Capacity * (mw)	Market cap  (Rs cr)	Mcap/ Mw
Adani Power	101	24.5	4.1	6,600	22,072	3.3
Tata Power	1,307	438.0	3.0	8,035	30,958	3.9
KSK Energy	197	56.3	3.5	2,792	6,835	2.4
Reliance Power	161	59.0	2.7	12,500	38,684	3.1
Indiabulls Power	40-45	19.8	2-2.6	3,975