After the Rs 12,500 crore Reliance Power mega-issue in January 2008, the primary market went into hibernation. The financial jugglery involved in RPower may have helped trigger complete cessation of investor interest.
Some 18 months later, the IPO market has revived. Interestingly, two power sector offerings have done the trick. First, Adani Power raised over Rs 3,000 crore (including pre-IPO placements of Rs 370 crore) and then, NHPC has picked up over Rs 6,000 crore.
Both issues were substantial and both saw comfortable over-subscription, in every category, including retail. What is more, neither company was rated “undervalued”. Analyst-consensus was the issues were conservative but fairly-priced.
One can't resist a few valuation comparisons. At Rs 100/share (the upper end of the IPO band), Adani Power has a market cap of roughly Rs 22,000 crore. At Rs 36, NHPC has a valuation of Rs 45,000 crore. Reliance Power is valued at around Rs 39,000 crore and Tata Power at about Rs 25,000 crore. The leader, NTPC is valued at around Rs 175,000 crore.
In terms of generation capacity, NHPChas around 5,200MW of current capacity and hopes to build another 4,600MW by 2013-14 and 20,000 MW by 2020. Adani targets 9,900MW capacity in place by 2012 and 20,000 MW by 2020. Adani has 6,500MW worth of projects under execution.
RPower has around 7,000MW under execution and hopes to put up another 28,000 plus MW of capacity in the next decade. Tata Power has a current capacity of about 2,800MW and 10,000MW in the pipeline. The giant NTPC has a current capacity of 28,000MW and plans another 22,000MW by 2011-12.
The capacity comparisons are however, between apples and oranges. Some plants are hydel, others thermal, and nuclear and renewables also figure in future plans. Plant load factors are very different for hydro (low), thermal (can be over 90 per cent) and other sources. Moreover, thermal plants can see massive variations in PLF. Cost of generation can vary a lot, depending on fuel price, fuel linkages and technology. Realisations also vary a lot. Projects could be delayed. Over the last 15-20 years, only around 50 per cent of the planned capacity has actually been built.
Financially, NTPC has a return on net worth of 14.5 per cent, Tata Power has RNW of about 8-9 per cent, while JP Hydro has an RNW of 15 per cent and NHPC about 6-7 per cent. RPower's current RNW is just 1 per cent but that will change radically once capacity is onstream. Given scale, let's say 15 per cent RNW is reasonable.
Despite complexities, which make comparisons and financial projections difficult, one trend is clear. Every generator is ramping up capacity. So is Power Grid Corporation, which is the national transmission monopoly (several private transmission projects are being mooted as well).
At distribution level, many states are experimenting with franchisee models that are less politically sensitive than privatisation. There are two power exchanges with about 40-50 traders actively matching short-term demand and supply.
Demand for power is obviously not the issue with double-digit peaking shortages everywhere. Over the past three years, fuel linkages have improved and new gas supplies should make the fuel position even more comfortable.
The weaknesses lie in transmission and distribution. State transmission systems log massive losses. Distribution (and payment collection) is also a black hole with huge losses.
Without improvements in T&D, investing in generation is very risky. The central government and various state governments must pull their weight if T&D is to improve. Dependence on government brings in large policy risks. As in every other sphere, reform and its effects will be uneven.
Earlier attempts at energising the power sector failed because the policy was to ignore the T&D factor and push generation. The private sector burnt its fingers badly in the mid-1990s. One assumes the new capacity expansions are backed by faith that reforms will work. Given India's record in governance, this may be optimistic.
Any investment in generation is therefore, a long-term play that carries a lot of risk. If 15 percent RNW is a sector norm, (tariffs will always be regulated) is it worth it? Investments elsewhere on the value-chain could yield safer, quicker and potentially higher returns. Equipment manufacturers and power traders for example, seem like safer plays.