Adani Group , a US $ 5 billion company based in Ahmedabad, is one of the fast growing Business House of the country with diverse interest in global trading, development and operation of Ports, IDC terminal, establishment of SEZ, Oil refining, logistics , gas distribution, Power Generation, Power Transmission and Power Trading etc.
Adani Power Ltd (APL) is a part of the Adani Group, a leading business group in India. Adani Enterprise Limited (AEL) is the promoter with a stake of 70.3%. AEL is the flagship company of the Adani Group, with total income of Rs. 26,274 cr for FY09. AEL is one of the largest traders of coal in India with coal mining rights both in the international and domestic markets.
APL is a power project development company. APL has four thermal power projects under various stages of development, with a combined installed capacity of 6,600 MW. In addition, it is also planning to develop two power projects with a combined installed capacity of 3,300 MW. APL intends to sell the power generated from these projects under a combination of long-term power purchase agreements to industrial and state-owned consumers and on merchant basis.
The Company was incorporated as Adani Power Limited on August 22, 1996 and received a certificate of commencement of business on September 4, 1996. The Company became a private limited company on June 3, 2002 and the name of the Company was subsequently changed to Adani Power Private Limited. The RoC issued a fresh certificate of incorporation on June 3, 2002.
The Company was originally incorporated by Mr. Gautam S. Adani and Mr. Rajesh S. Adani, together with their relatives. In 2004, pursuant to internal restructuring amongst the Promoters, the entire shareholding of the Company was transferred to Mundra Port and Special Economic Zone Limited (MPSEZL). Subsequently, on May 29, 2006, MPSEZL transferred its entire shareholding in the Company to Adani Enterprises Limited.
The Company was, thereafter, converted into a public limited company on April 12, 2007 and the name of the Company was changed to Adani Power Limited.
APL'S STRUCTURE:
Name
Purpose
Adani Power Ltd
Mundra Power Projects (4,620 MW
Subsidiary
Adani Power Maharashtra Ltd -76.64% (APML)
Tiroda Power Project (1,980 MW)
Adani Power Dahej Ltd (100%)
Power Project (1,980 MW)
Adani Power Rajesthan Ltd (100%)
planned Kawai Power Project (1,320 MW)
APL'S KEY MILESTONES:
Some of the key events and milestones in the history of the company is furnished in the below table,
Date
Details
August 22, 1996
Incorporation of the Company
September 20, 2006
Execution of Loan agreement (financial closure) with Lenders of Mundra Phase I Power Project
December 8, 2006
Coal supply agreement with AEL for Mundra Phase I Power Project, which was extended to Mundra Phase II Power Project through amendment agreement dated August 10, 2007
February 2, 2007
Execution of PPA with GUVNL for 1,000 MW
February 6, 2007
Execution of PPA with GUVNL for 1,000 MW
June 27, 2007
Execution of subordinate loan agreement for Mundra Phase I and II Power Project
July 25, 2007
Execution of Loan agreement (financial closure) with Lenders of Mundra Phase II Power Project
September 28, 2007
Execution of Investment Agreement with 3i Power Investment A1 Limited
November 6, 2007
Allocation of Lohara West and Lohara Extension (E) Coal mining blocks for Tiroda Power Project
January 15, 2008
Execution of Shareholder Agreement with Millennium Developers Private Limited for investment in Tiroda Project
February 1, 2008
Agreement to Lease for 204.28 ha signed with Maharashtra Industrial Development Corporation for Tiroda Project
March 24, 2008
PPA with AEL for 221 MW
March 24, 2008
Coal supply agreement with AEL for Mundra Phase III Power Project
March 27, 2008
Execution of loan agreement (financial closure) for Mundra Phase III Power Project.
March 27, 2008
Execution of subordinate loan agreement for Mundra Phase III Power Project
March 28, 2008
Execution of foreign currency loan agreement for Mundra Phase III Power Project
April 15, 2008
Coal supply agreement with AEL for Mundra Phase IV Power Project, which was amended on April 13, 2009
August 7, 2008
PPA with UHBVNL for 712 MW
August 7, 2008
PPA with DHBVNL for 712 MW
September 8, 2008
PPA with MSEDCL for 1,320 MW
November 24, 2008
Investment Agreement with Ventura Power
January 8, 2009
Co-developer agreement with MPSEZL
January 30, 2009
Execution of loan agreement (financial closure) for Tiroda Power Project - Phase I
March 25, 2009
Boiler light-up of unit I of Mundra Power Project - Phase I
March 27, 2009
Share subscription agreement with Somerset Fund
May 23, 2009
Synchronization of unit I on Mundra Phase I Power Project
June 24, 2009
Execution of loan agreement (financial closure) for Mundra Phase IV Power Project
June 24, 2009
Execution of subordinate loan agreement for Mundra Phase IV Power Project.
SHARE HOLDER PATTERN OF THE APL'S FOR THE PERIOD ENDED AT 31 MARCH 2010:
APL'S FINANCIAL RESULT:
APL'S STRATEGY
Capitalize on the growth of the Indian power generation sector.
Realize the opportunities presented by power sector reforms and benefits extended by the Government of India.
Benefit from the power scenario in Western India.
Secure fuel supply.
Further integrate its power generation business with the installation of transmission lines.
Optimize operational efficiency.
Engage in an optimal mix of off-take arrangements with state-owned and industrial consumers.
APL'S PROJECT:
Given below is a summary of APL's power projects that are currently under various stages of implementation.
Mundra Phase I and II Power Project have four sub-critical generation units of 330 MW each, with combined capacity of 1,320 MW. The boiler, turbine and generator ("BTG") package for Mundra I and II was awarded to Sichuan Machinery and Equipment Import and Export Company Limited and Kowa Company Limited, respectively. First 330 MW unit of Mundra Phase I and II Power Project was commissioned on July 2009, and that the power project was fully commissioned on 2010.
Mundra Phase III Power Project will have two super-critical generation units of 660 MW each, with combined capacity of 1,320 MW. The engineering, procurement and construction ("EPC") contract for Mundra III was awarded to SEPCO-III Electric Power Construction Corporation and Shandong Tiejun Electric Power Engineering Company Limited. We currently expect that the first 660 MW unit of Mundra Phase III Power Project will be commissioned by January 2011, and that the power project will be fully commissioned by June 2011.
Mundra Phase IV Power Project will have three super-critical generation units of 660 MW each, with combined capacity of 1,980 MW. The EPC contract for Mundra IV was awarded to SEPCO-III Electric Power Construction Corporation and Shandong Tiejun Electric Power Engineering Company Limited. We currently expect that the first 660 MW unit of Mundra Phase IV Power Project will be commissioned by August 2011, and that the power project will be fully commissioned by April 2012.
Tiroda Power Project will have three super-critical generation units of 660 MW each, with combined capacity of 1,980 MW. The BTG package for Tiroda was awarded to Sichuan Machinery and Equipment Import and Export Company Limited. We currently expect that the first 660 MW unit of Tiroda Power Project will be commissioned by July 2011, and that the power project will be fully commissioned by April 2012.
Company also planning to develop two thermal power projects at Dahej and Kawai with a combined installed capacity of 3,300 MW
Financial Snapshot of the project commissioned and under implementation stage are as follows:
Mundra I & II
Mundra-III
Mundra-IV
Tiroda
Capacity
1320
1320
1980
1980
Adani Power stake
100
100
100
100
Project Cost (Rs Cr)
4350
5796
8960
9263
Project cost/MW
3.3
4.4
4.5
4.7
Equity(%) as of date
16.2
20.5
20.0
20.0
Debt as of date
83.8
79.5
80.0
80.0
MEANS OF FINANCE:
The following table sets forth the total expenditure expected to be incurred on APL projects, amount proposed to be financed from Net Proceeds of this Issue, and other means of financing:
Project
Total
Estimated
Expenditure
Amount
proposed
to be
financed
from Net
Proceeds
Balance
amount
Amount
financed/
proposed
to be
financed
from
Internal
Accruals/
Equity
other than
current
Issue
Amount
financed/
proposed
to be
financed
from
secured
loans
Amount
deployed
as of
February
28, 2009
Amount
deployed
as of
February
28, 2009
from
Equity
Amount
deployed
as of
February
28, 2009
from
secured
loans
Mundra IV,
Gujarat
89,600
11,530
78,070
6,390
71,680
8,649.95
649.95
-
Tiroda,
Maharashtra
implemented
by APL
Subsidiary
92,630
10,400
82,230
8,126
74,104
2,688.00
2,688.00
-
General
Corporate
Purposes
-
-
-
-
-
-
-
-
The fund requirements mentioned above are based APL's current business plan. APL may have to revise estimated costs and fund requirements owing to factors such as geological assessments, exchange or interest rate fluctuations, changes in design and configuration of the projects, increase in input costs of steel & cement, other construction materials and labour costs, incremental rehabilitation, other preoperative expenses and other external factors which may not be in APL control. This may include rescheduling of APL capital expenditure programs or changes in the capital expenditure for a particular purpose vis-à-vis current plans at the discretion of APL management. There may also be requirements that may arise on account of new acquisitions, mergers and winning of various projects that we have either bid for or are in the process of bidding. In case of any increase in the actual utilisation of funds earmarked for the above activities or actual Net Proceeds from this Issue being lower than contemplated, such shortage will be met from a combination of internal accruals, additional equity or debt infusion. In case of surplus funds either due to lower utilization than what is stated above or surplus Issue proceeds after meeting all the above mentioned objects, the same shall be utilised towards general corporate purposes
For the purpose of rising above fund for the project APL has issued IPO on July 2009
INITIAL PUBLIC OFFERING (IPO) :
Initial public offering (IPO), also referred to simply as a "public offering", is when a company issues common stock or shares to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded. In an IPO, the issuer may obtain the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), best offering price and time to bring it to market. Initial Public Offering (IPO) in India means the selling of the shares of a company, for the first time, to the public in the country's capital markets. This is done by giving to the public, shares that are either owned by the promoters of the company or by issuing new shares. During an Initial Public Offer (IPO) the shares are given to the public at a discount on the intrinsic value of the shares and this is the reason that the investor buy share during the initial public offer in order to make profit for themselves.
IPO in India is done through various methods like book building method, fixed price method, or a mixture of both. The method of book building has been introduced in the country in 1999 and it helps the company to find out the demand and price of its shares. A merchant banker is nominated as a book runner by the Issuer of the IPO. The company that is issuing the Initial Public
Offering (IPO) decides the number of shares that it will issue and also fixes the price band of the shares. All these information are mentioned in the company's red herring prospectus. During the company's Initial Public Offering (IPO) in India, an electronic book is opened for at least five days. During this period of time, bidding takes place which means that people who are interested in buying the shares of the
Company makes an offer within the fixed price band. Once the book building is closed then the issuer as well as the book runner of the Initial Public Offering (IPO) evaluate the offers and then determine a fixed price. The offers for shares that fall below the fixed price are rejected. The successful bidders are then allotted the shares
IPO's can be a risky investment. For the individual investor, it is tough to predict what the stock or shares will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company. Also, most IPO's are of companies going through a transitory growth period, and they are therefore subject to additional uncertainty regarding their future value
DIFFERENT KIND OF ISSUE:
REASONS FOR LISTING:
The existing shareholders will see their shareholdings diluted as a proportion of the company's shares. However, they hope that the capital investment will make their shareholdings more valuable in absolute terms.
In addition, once a company is listed, it will be able to issue further shares via a rights issue, thereby again providing itself with capital for expansion without incurring any debt. This regular ability to raise large amounts of capital from the general market, rather than having to seek and negotiate with individual investors, is a key incentive for many companies seeking to list.
MAJOR REASON FOR LISTING IPO:
The increase in the capital: An IPO allows a company to raise funds for utilizing in various corporate operational purposes like acquisitions, mergers, working capital, research and development, expanding plant and equipment and marketing.
Liquidity: The shares once traded have an assigned market value and can be resold. This is extremely helpful as the company provides the employees with stock incentive packages and the investors are provided with the option of trading their shares for a price.
Valuation: The public trading of the shares determines a value for the company and sets a standard. This works in favor of the company as it is helpful in case the company is looking for acquisition or merger. It also provides the share holders of the company with the present value of the shares.
Increased wealth: The founders of the companies have an affinity towards IPO as it can increase the wealth of the company, without dividing the authority as in case of partnership.
IPO MARKET IN INDIA:
The IPO Market in India has been developing since the liberalization of the Indian economy. It has become one of the foremost methods of raising funds for various developmental projects of different companies.
The IPO Market in India is on the boom as more and more companies are issuing equity shares in the capital market. With the introduction of the open market economy, in the 1990s, the IPO Market went through its share of policy changes, reforms and restructurings. One of the most important developments was the disassembling of the Controller of Capital Issues (CCI) and the introduction of the free pricing mechanism.
This step helped in developing the IPO Market in India, as the companies were permitted to price the issues. The Free pricing mechanism permitted the companies to raise funds from the primary market at competitive price.
The Central Government felt the need for a governed environment pertaining to the Capital market, as few corporate houses were using the abolition of the Controller of Capital Issues (CCI) in a negative manner. The Securities Exchange Board of India (SEBI) was established in the year 1992 to regulate the capital market. SEBI was given the authority of monitoring and regulating the activities of the bankers to an issue, portfolio managers, stockbrokers, and other intermediaries related to the stock markets. The effects of the changes are evident from the trend of the resources of the primary capital market which includes rights issues, public issues, private placements and overseas issues.
The IPO Market in India experienced a boom in its activities in the year 1994.
In the year 1995 the growth of the Indian IPO market was 32 %.
The growth was halted with the South East Asian crisis.
The markets picked up speed again with the introduction of the software stocks.
IPO ALLOTMENT STATUS:
Initial public offering is also popularly known as IPO, is the first time sale of stocks, of a private company. A new company can launch IPO to raise capital to initiate its business. Moreover, Initial Public Offering can also be launched to raise money for expansion or other important operations of an existing company. The sale of stock through such Initial Public Offering (IPO) is meant for the individual and corporate investors. The aim of such issuance of Initial Public Offering is to invest the accumulated corpus for, either opening -up of a company or expansion of an existing company.
Thus, effectively, an Initial Public Offering pools investments and utilizes it in building or expansion of the said company. The shares held by such investors give them the rights of the company and to its future profits. The process which involves determination of the issue size and type, offer price and best time of introduction into the market is called "underwriting". The underwriting is generally done by the investment bankers. These underwriting firms or investment bankers are allotted some specified numbers of shares to sell, which is called as IPO Allotment Status.
In other words, IPO Allotment Status can also be defined as the number of stocks which an investment banker is permitted to sell to the general investor before the share is being traded on an exchange. The excess shares are then allotted to other investment bankers which are eligible to sell such shares. In India, the main governing body that determines such eligibility criteria and the IPO Allotment Status is the Securities and Exchange Board of India (SEBI).
IPO - PROCEDURE:
IPO's generally involve one or more investment banks as "underwriters." The company offering its shares, called the "issuer," enters a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell these shares.
The sale (that is, the allocation and pricing) of shares in an IPO may take several forms. Common methods include:
Best efforts contract
Firm commitment contract
All-or-none contract
Bought deal
Dutch auction
Self distribution of stock
A large IPO is usually underwritten by a "syndicate" of investment banks led by one or more major investment banks (lead underwriter). Upon selling the shares, the underwriters keep a commission based on a percentage of the value of the shares sold. Usually, the lead underwriters, i.e. the underwriters selling the largest proportions of the IPO, take the highest commissions-up to 8% in some cases.
Multinational IPOs may have as many as three syndicates to deal with differing legal requirements in both the issuer's domestic market and other regions. For example, an issuer based in the E.U. may be represented by the main selling syndicate in its domestic market, Europe, in addition to separate syndicates or selling groups for US/Canada and for Asia. Usually, the lead underwriter in the main selling group is also the lead bank in the other selling groups.
Because of the wide array of legal requirements, IPOs typically involve one or more law firms with major practices in securities law, such as the Magic Circle firms of London and the white shoe firms of New York City.
Usually, the offering will include the issuance of new shares, intended to raise new capital, as well the secondary sale of existing shares. However, certain regulatory restrictions and restrictions imposed by the lead underwriter are often placed on the sale of existing shares.
Public offerings are primarily sold to institutional investors, but some shares are also allocated to the underwriters' retail investors. A broker selling shares of a public offering to his clients is paid through a sales credit instead of a commission. The client pays no commission to purchase the shares of a public offering; the purchase price simply includes the built-in sales credit.
The issuer usually allows the underwriters an option to increase the size of the offering by up to 15% under certain circumstance known as the green shoe or over allotment option.
The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), the best offering
MAJOR PROCESS OF AN IPO:
Eligibility Criteria:
Net Tangible assets of Rs. 3.00 Crore in each of the preceding 3 years.
Track record of Distributable profits at least 3 out of 5 preceding years.
The Company has a Networth of Rs. 1.00 Crore in preceding 3 years.
The proposed issue should not exceed 5 times of its Pre-issue
The process of an IPO - Eligibility criteria: (Alternate route)
Book building process and 50% of the offer to QIBs or
15% participation in project by F/Is or Schedule Banks;
10% of the Project cost from appraiser;
10% of the Issue to QIBs.
Minimum post issue face capital of Rs.10 Crores or
Market making for 2 years and Minimum number of allottees atleast 1000
Official Process of IPO
Appointment of Brokers, Advertisers and Bankers
Conducting Road shows and Press Conference
Opening and closing of Subscription list
Preparation of Basis of Allotment
Allotment of shares
Listing of shares
price and the time to bring it to market
REASON OF THE OFFERING NEW IPO:
Funds Requirement
Funding Plan (Means of Finance)
Appraisal
Schedule of Implementation
Funds Deployed
Sources of Financing of Funds already deployed
Details of Balance Fund Requirement
Interim Use of Funds
Basic Terms of Issue
Basis for issue price
Tax Benefits
OBJECTS OF INITIAL PUBLIC OFFER (IPO) ISSUED BY APL:
As mentioned above APL is planning to expand its operation from 1320 MW to 3960 with in the financial year 2012.
APL plans to raise between Rs. 2,646 cr to Rs. 2,940 cr to fund the expansion of its ongoing and future power projects. .
APL intends to use the monies raised to part finance the construction and development of Mundra Phase IV Power Project for 1,980 MW and for funding the equity contribution in its subsidiary Adani Power Maharashtra . to part finance the construction and development cost of power project for 1,980 MW at Tiroda, Maharashtra and other general corporate bases.
Project (Rs.
cr)
Total
estimated
cost
Amount
proposed to be
financed from
issue proceeds
Amount to be
financed via internal
accruals / equity
Amount to be
financed via
secured loans
Mundra IV,
Gujarat
8,960.0
1,153.0
639.0
7,168.0
Tiroda,
Maharashtra
9,263.0
1,040.0
812.6
7,410.4
For the purpose of rising above fund APL has issued IPO on july 2009, the detail of the same is as follows,
ISSUE SNAPSHOT:
Issue opens : 28 July 2009
Issue closes : 31 July 2009
Price band : Rs. 90 - Rs. 100 per share
Issue Size : 30.2 cr equity shares
Employee reservation : 0.8 cr shares
Net Issue Size : 29.4 cr shares
Net Issue Size at lower price band: Rs. 2,646 crs
Net Issue size at upper price band: Rs. 2,940 crs
QIB : at least 60% of issue
Non-institutional : 10% of issue
Retail : 30% of issue
Face Value : Rs. 10
Book value on 31 March 09 : Rs. 12.4
Minimum bid lot : 65 shares
100% book building process
CAPITAL STRUCTURE:
Pre Issue Equity : Rs. 1878.3 cr
Post issue Equity : Rs. 2180.0 cr
Listing : BSE & NSE
Global Coordinator and Book Running Lead
Manager : DSP Merrill Lynch Ltd
Book Running Lead Managers : Enam
Securities, IDFC-SSKI, JM Financial, Kotak, Mahindra, Morgan Stanley, ICICISecurities, SBI Capital Markets Ltd Registrar to Issue: Karvy Computershare Pvt Ltd
IPO GRADING:
ICRA Ltd has assigned the issue IPO Grade 3 indicating average fundamentals.
SHAREHOLDING PATTERN:
Shareholding
pattern
Pre Issue
%
Post Issue
%
Adani Enterprise
81.5
70.3
Ventura Power
3.8
3.3
3i Power Investment
8.6
7.4
Adishree Tradelinks
3.6
3.1
Capital Trade & Invst
1.4
1.2
Others
1.1
0.9
Employees
-
0.4
Public
-
13.5
Total
100
100
LISTING:
The Equity Shares offered through this Red Herring Prospectus are proposed to be listed on the NSE and the BSE. The Company has received an 'in-principle' approval from the NSE and the BSE, for the listing of the Equity Shares pursuant to letters.
Compliance Officer or the Registrar to the Issue in case of any pre or post- Issue related problems, such as non-receipt of letters of allotment, credit of allotted shares in the respective beneficiary account and refund orders,
GLOBAL COORDINATOR AND BOOK RUNNING LEAD MANAGER:
MONITORING AGENCY:
The Monitoring Agency will be appointed prior to the filing of the Red Herring Prospectus with the RoC.
CONCERNS:
APL has no operating history, so it is difficult to estimate its future performance.
APL is associated with a number of power project related risks - The development of power projects involves various risks, including among others, regulatory risk, construction risk, financing risk and the risk that these projects may prove to be unprofitable.
APL faces significant competition as a result of deregulation in the Indian power sector.
epreciation of the Rupee against foreign currencies may have an adverse effect on results of operations (project equipment related costs, debt in foreign currency, coal import costs).
Delay in execution and date of commissioning could adversely impact the performance of the company - The scheduled completion targets for power projects are estimates and are subject to delays as a result of, among other things, contractor performance shortfalls, unforeseen engineering problems, dispute with workers, force majeure events, availability of financing, unanticipated cost increases or changes in scope and inability in obtaining certain property rights, fuel supply and government
approvals, any of which could give rise to cost overruns or the termination of a power project's development. There can be no assurance that the power projects will be completed in the time expected, or at all, or that their gestation period will not be affected by any or all of these factors.
APL may not be able to acquire sufficient land area for its Tiroda project - APL is in the process of identifying and acquiring a portion of land required for developing its Tiroda Power Project. If APL is unable to acquire sufficient amount of land for its Tiroda project, the viability and efficiency of the project may be affected.
Debt heavy, negative cash flows - APL has incurred significant indebtedness and further intends to incur substantial borrowings in connection with the development of its power projects. APL has used DER of 80:20 to finance its projects. Regulated companies like NTPC follow the normative DER of 70:30 and other private players have achieved financial closure at 75:25 DER (eg Sasan UMPP, Mundra UMPP). This along with the fact that a significant proportion of the capacity is open increases the risk associated with the projects. In the event of a delay in commissioning of its power plants or any unforeseen circumstance, APL may not be able to meet its obligations under these debt-financing arrangements. As of May 31, 2009, Rs. 44,339.07 million of APL's indebtedness consisted of floating rate indebtedness. Upward fluctuations in interest rates could increase the cost of both existing and new debts.
Fuel requirements at competitive prices - The success of APL's operations will depend, among other things, on its ability to source fuel at competitive prices. APL will be sourcing coal from AEL for its power projects at Mundra. PT Adani Global, a wholly owned subsidiary of AEL, has entered into agreements with holders of long-term exploitation licenses to exclusively mine coal in Bunyu Island, Indonesia. The mine has 150 mt of reserves of 5,200 kcal/kg GCV coal. APL will need ~14mt of this coal for its 4,620 MW Mundra power projects. AEL has signed an agreement to supply coal at US $36 per tonne (CIF Mundra) to APL with an escalation of 10% every five years. However, the PPAs typically last for 25 years and APL has only secured coal supplies for a period of 15 years with AEL. Therefore, APL will have to renegotiate the coal supply agreements with AEL (however, the Bunyu mines reserves may not be sufficient so this could be based on some other mine) or find alternative coal suppliers. Further, the production at the Bunyu mines will have to be ramped up almost 5 times from the current levels in order to supply the requisite amount to APL. Any delay on this front could adversely impact APL's operations. While the price of $36 per tonne seems attractive from APL's point of view, the Indonesian Government could ask coal miners to re-negotiate under-priced contracts which could adversely impact APL.
Bunyu mines - One license has not yet been granted to the counter party - The total reserves of 150 mt are divided into three mining licenses (Indonesian parties). While the counter parties under the mining contracts for two of the three mines have procured long term exploitation licenses to mine coal the third license has not yet been granted to the counter party under the third mining contract.
Issues about the quality of Chinese equipment - APL is using 100% Chinese equipments for all the power projects. Only 1,500MW of power capacity has been added in the XI plan based on Chinese equipment so far and this 6,600 MW would be a large addition. Chinese equipment is cheaper than BHEL equipment and the delivery schedules are shorter, however, the life cycle costs may not be lower than BHEL. Performance of the power plants supplied by Chinese manufacturers in India so far has been poor. Under-performance of the equipment or increase in O&M costs could adversely affect APL's performance.
PR issues on supercritical equipment - Recently the CEA, India's apex power sector planning body has written to state electricity boards, public and private utilities, and private power generation firms that power equipment maker Shanghai Boiler Works Ltd (SBWL) may not have the legal right to supply so-called supercritical boilers in India. Alstom has reiterated that there are only two designs of supercritical boilers in the world -Siemens' and Alstom's. While APL has ordered equipments for its three plants with Shandong Electric Power Corporation (SEPCO III) of China, it is not clear at this point whether IPR issues relating to supercritical technology could affect supply of equipment by them to APL, resulting in uncertainties in implementation schedule.
The recently enacted Indonesian law on mineral and coal mining and the regulations expected to be promulgated there under could adversely affect AEL's coal mining rights in Indonesia. On December 16, 2008, the Indonesian Parliament adopted a law on mineral and coal mining (New Mining Law). The New Mining Law provides that existing contracts will continue to be valid until their expiry, but that the terms of the existing contracts must be modified within one year to make them comply with the New Mining Law. However, the New Mining Law is unclear as to which of its provisions will require amendments to the terms of existing contracts to bring those contracts into compliance with the New Mining Law. The existing holders of contracts may be given five years to comply with such obligation. However, the New Mining Law does not provide any details on when these government regulations will be issued or what specific obligations will be imposed. The legal uncertainty raised by the adoption and implementation of the New Mining Law has increased the risks, and may increase the costs, involved in sourcing Indonesian coal. Further, implementing regulations expected to be issued by the Indonesian government in the future may impose significant changes to the regulation of the Indonesian mining industry, which may be adverse to APL. The compliance by AEL with the New Mining Law and its implementing regulations may increase APL's operating costs in the future which could adversely affect its performance.
The coal quantity agreed to be supplied by Mahanadi Coalfields, South Eastern Coalfields and Western Coalfields is conditional upon APL achieving certain milestones over the next 24 months and then signing of definitive coal supply agreements.
APL is dependent on group company AEL for supply of coal as well as for part of its sales (merchant sales). This could raise issues about conflict of interest.
If power evacuation facilities are not made available by the time power projects are ready to commence operations, APL may incur significant transmission costs and operations could be adversely affected.
Failure to enter into off-take arrangements in a timely manner and on terms that are commercially acceptable to APL could adversely affect its business. APL is developing power projects with combined installed capacity of 6,600 MW. Of the 6,600 MW,APL has entered into PPAs for 4,744 MW with various state electricity boards and an agreement for merchant sale of up to 221 MW of power from Mundra Phase III Power Project with AEL. APL will need to enter into other off-take agreements for the balance of the power to be generated by its other power projects. As power plants are currently not permitted to sell electricity directly to retail power consumers, the consumer base for power projects without PPAs is limited to state utility companies, electricity boards, industrial consumers and licensed power traders.
APL has about 1,800 MW of capacity to sell on merchant basis. While the merchant power tariff continues to remain high,going ahead given the momentum with which power projects are coming up in Gujarat and Maharashtra the peak power deficit may decline and subsequently the merchant power tariffs could reduce. Further, any interference from the regulator to cap the tariff cannot be ruled out in the future which will be a risk to Adani Power's earnings profile.
Change or removal of tax benefits under the SEZ or Mega Power policy could negatively affect APL.
APL has issued equity shares during the last one year at a price other than the issue price. The same has been summarized below.
Date of allotment
No of shares - lacs
Issue price (Rs.)
Name of allottee
31-Mar-09
705.2
70
Ventura Power (Promoter Group Co)
03-Apr-09
3.6
70
Ventura Power (Promoter Group Co)
25-Jun-09
91.42
81.42
3i Power Investments A1 Ltd
25-Jun-09
269.05
111.5
Capital Trade & Investment Private Ltd
INVESTMENT RATIONALE:
DEMAND SUPPLY MISMATCH OF POWER TO CONTINUE OVER LONG PERIOD:
India is amongst the fastest growing economics globally and has grown at an average rate of 8.5% per annum during the last five years. The Indian power sector has historically been characterized by energy shortages which have been increasing over the years. In the period from April 2009 to May 2009, peak energy deficit was estimated to be at 12.3% and normative energy deficit was estimated to be 8.9%. In addition to this due to inadequate supply and distribution infrastructure the per capita consumption of energy in India is extremely low in comparison to most other parts of the world. In the implementation of the last three five year plans, covering fiscal years 1992 to 2006, less than 50% of the targeted additional energy capacity was added.
MIX OF LONG TERM CONTRACT AND MERCHANT POWER SALES WILL DRIVE THE PROFITABILITY:
APL is planning to sell electricity pursuant to a mix of off-take arrangements, including long-term power purchase agreements and merchant sales. The company intends to sell power to both state-run utility companies and industrial consumers pursuant to secured long-term off-take arrangements. It also intends to sell power on merchant basis. The company has entered into long-term PPAs for a total of 4,744 MW of power. As such balance can be sold as merchant power in open market. The realization in long term agreement are based on return on equity of 16% with which unit selling price of power is around Rs.2.5 to Rs.3.5. On the other hand the current merchant power sales rates are around Rs.5.5 to Rs.6.5 per unit but carry a risk on account of off take of power. We believes that the combination of long-term and merchant arrangements will provide optimal returns to company.
WELL SET FOR IMPLEMENTATION:
APL is planning to set up four thermal based power plants of capacity 6600 MW by Apr-2012. The EPC and BTG contracts for all the plants are well in place along with the fuel linkages. The company has also entered into PPA agreement for a total of 4744 MW. For Mundra Phase I the 1st unit becomes operational in Jul-2009. By the end of FY 10 Mundra Phase I & II will become operational with a total power generation capacity of 1320 MW.
CONCLUSION AND RECOMMENDATION:
APL was coming out with a net issue of 29.4 cr shares to the public, which represents 13.5% of the post-issue paid up capital of the company. The IPO price band is Rs. 90 - Rs. 100 resulting in a market capitalization of the company between Rs. 19,620 cr to Rs. 21,800 cr. APL is expected to add highest generation capacity in the XI Plan among private sector players and plans to increase its capacity from 330 MW as of June FY09 to 6,600 MW by April 2012. Part of the IPO proceeds (between Rs. 2,646 cr to Rs. 2,940 cr) are to be utilized for part financing of the same and the rest of the monies raised could be used for corporate purposes and other proposed projects like Dahej and Kawai Power projects.
A large part of APL's net profits in FY12 and FY13 will be derived from merchant power capacity. This increases the risk profile of earnings to merchant tariffs and commissioning schedules. Economic slowdown, coming up of other power plant capacities in Gujarat and Maharashtra could keep a cap on upsides from merchant tariffs. Next, APL has used debt aggressively (DER of 80:20) to finance its projects. Regulated companies like NTPC follow the normative DER of 70:30 and other private players have achieved financial closure at 75:25 DER (eg Sasan UMPP, Mundra UMPP). This along with the fact that a significant proportion of the capacity is open increases the risk associated with the projects. On the other hand it also means that the RoE of APL going ahead could be higher than is peers and its Marketcap to MW ratio could be lower.
Further, APL is highly dependent on the Bunyu mines, Indonesia for its fuel supply. Adverse regulatory developments and related risks could impact the pricing of coal from Indonesia and hence impact APL's cash flows, ROE and payback period. Lastly, another area of concern is the use of Chinese equipment. While the Chinese equipments offer lower cost and quicker delivery time periods, the key point of contention has been the limited track record of such projects to operate on Indian coal and IPR related issues for super-critical projects. Chinese equipment in India has been reported of operating at PLFs below 70%. Part of the under-performance could be because of other factors like availability of fuel, improper O&M, experience of the operator etc. However, it remains an area of concern.
As per reports, the fair value of APL's business ranges from Rs. 60 - Rs. 90 per share under various situations. The IPO price band of Rs. 90 - Rs. 100 assumes timely execution and hence appears to be stiffly priced. Further, APL is available between 3.9x - 4.1x post-IPO book value. This is significantly higher than the P/BV of other players like NTPC and Reliance Power, both of which are available at 3x P/BV. Further, given below is a table summarized the capex plans and Mcap/MW of NTPC, APL and Reliance Power. While APL is highly priced in comparison to NTPC it is cheaper in comparison to Reliance Power.
Capacity (MW)
FY10
FY11
FY12
NTPC
30000
34060
39100
Adani Power
1320
1980
3960
Reliance Power
600
1500
2820
Market Cap (Rs cr)*
NTPC
173856
173856
173856
Adani Power
21800
21800
21800
Reliance Power
41527
41527
41527
Market Cap (Rs cr / MW)
NTPC
5.8
5.1
4.4
Adani Power
16.5
11.0
5.5
Reliance Power
69.2
17.7
14.7
Though the issue seems to be stiffly priced in comparison to established players like NTPC, it commands lower valuations than companies like Reliance Power. Medium risk investors could subscribe to the issue for some listing gains given the increase in risk appetite and buoyancy in the broader markets, while long-term investors could wait for an opportune entry point in secondary markets. However long term investors should keep in mind the two key risks of fuel availability (ability of AEL to scale up the mining and shipment of coal in line with requirements of APL) and the issue about IPR in super critical boilers (that could result in some uncertainty on implementation schedule of projects).
