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Adani Power Lists at Premium

The company has taken the first few steps, after the IPO, positively

Adani Power Ltd, which raised nearly Rs 3,100 crore through an initial public offer (IPO), was listed on the Bombay Stock Exchange (BSE) today.

The issue got subscribed 21.51 times, making it the most sought after IPO after Reliance Power's in January last year.

Shares were issued at Rs 100 each which was the upper price in the band and it got listed with a 5 per cent premium at Rs 105. The company diluted 13.47 per cent stake in favour of public shareholders through 33.7 crore equity shares.

Adani Enterprises, which earlier held close to 85 per cent of the company’s shareholding, will now hold 73.5 per cent. Preferential allotment has been made to3i Investment, the UK private equity firm, which comes to 7.37 per cent of the total.

It is expected that the proceeds from the IPO will be used to fund its two thermal power plants in Gujarat, one in Mundra and another in Tiroda, totaling 6,600 megawatt capacity. Some Rs 2,193 crore of the issue proceeds will be used for funding its projects, while the balance would be utilised for general corporate purposes.

Investment Rationale
The rationale provided by some of the experts were as following:

1. The track record of the company's management team is well established.

2. The vertically integrated business model will be an added bonus for the company. It can use its leveraged position as Adani Enterprises is into shipping, coal trading and coal mining.

3. Long-term fuel tie-ups with its parent company and the Ministry of Coal.

4. Tax exemptions are being enjoyed by the company especially for its Mundra Power plants on account of Adani Power Ltd being the developer of Mundra SEZ (unless the new tax code is implemented). Tiroda project will be subject to minimum alternate tax (MAT) and would lead to higher margins and thus result in higher RoE (50%).

Risk & Concern

Some of the experts have pointed the following risk factors when the IPO was offered.

a) The company (Adani Power) has no operating history, so it is difficult to estimate their future performance. It has no power projects in operation or other revenue generating operations, and no significant operating history from which the investor can evaluate the business, future prospects and viability.

b) The company might not be able to acquire sufficient land area for their Tiroda project. Timely acquisition of land affects the viability and efficiency of the project. Any delays can be crippling.

c) Adani Power has outstanding debt of Rs 49,919.04 million as of March 31, 2009. This will severely limit their ability to raise more capital

d) Increases in interest rates will adversely affect it -- it is expected that interest rates will go up in 3-4 months time, as the economic conditions improve. Most of Adani Power’s debt is on a floating rate of interest and so they will be affected in a major way.

However, the stock shed all gains by the end of the trading day, closing at Rs 100 on the Bombay Stock Exchange. It had started the day at Rs 105 and hit the top price of Rs 107.90. This was disappointing for investors since Sensex closed 1.37 per cent higher. Also, the parent company Adani Enterprises saw its stock hit by as much as 19.15 per cent.