Value unlocking
Adani Enterprises’ move to separately list its power generation subsidiary, Adani Power helped the latter raise funds for expansion while simultaneously unlock shareholder value for the former. In case of Adani Enterprises, its share price soared from Rs 279 on April 1 2009 to almost Rs 850 per share by the end of July (currently around Rs 700), reflecting a gain of over 200 per cent. During this period, the BSE Sensex was up just 54 per cent. Adani Enterprises’ out-performance on the bourses is largely due to its holding (70.25 per cent stake of post-IPO equity) in Adani Power. The power company is currently valued at Rs 22,000 crore by the market, which works out to Rs 385-400 per share of Adani Enterprises. In terms of per megawatt (mw), Adani Power is valued at Rs 3.33 crore per mw, based on its planned power capacity 6,600 by April 2012.
Can other companies make use of this opportunity to unlock value for its shareholders? Tarun Sisodia, director and head of research, Anand Rathi Financial Services thinks so. Says he, “There is definitely a case for the companies, which have lined up for listing their power subsidiaries, creating value for the holding companies. We have already seen this happening in many cases, including the recent IPO of Adani Power.”
While Adani Power is just one recent example and the business dynamics would vary across companies based on their execution capability, project size, fuel linkages, quantum of merchant power sales and so on, the development indicates that similar moves by other companies has the potential to unlock value for shareholders. While subsidiaries raise money to fund their expansion plans, there could be further value creation, albeit in the long-run, as projects materialise into revenues and profits.
Upsurge in appetite
For now, the market too is showing good appetite for such paper. “The new power IPOs should create value for the existing investors (parent company), because today it seems that anything related to energy or power is able to tap the primary market at handsome valuations due to the investors’ appetite for the sector,” says Ambareesh Baliga, vice-president, Karvy Stock Broking.
Here, Sisodia says, “The increased appetite for power companies is because of its defensive nature given that the return on equity (RoE) is guaranteed and cash flow is stable. Everybody likes to have power companies in their portfolio.”
The Smart Investor looked at five companies, which have power subsidiaries and plans for their IPOs, to understand the extent of value that these companies can create for their existing shareholders. Read on to know more.
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| IPO PIPELINE | ||||
| Issue size * (Rs cr) | Holding company | Stake (%) | Status | |
| JSW Energy | 3,000.00 | JSW Steel, JSW Holding | 5.71, 19.7 | Draft filed; Likely in 2-3 mths |
| Jindal Power | NA | Jindal Steel & Power (JSPL) | 100 | Planned in 2009-10 |
| Sterlite Energy | 3,000.00 | Sterlite Industries | 100 | Expected in 3-4 months |
| GMR Energy | 4,000.00 | GMR Infrastructure | 100 | Yet to take a call |
| Indiabulls Power | 1,500.00 | Indiabulls Real Estate | 71.43 | Draft filed; Expected soon |
| Usher Eco Power | 52.5 | Usher Agro | 19.74 | Draft filed; Yet to take a call |
| Bhilwara Energy | 1,400.00 | HEG | 39.16 | Yet to take a call |
| * Issue size is estimated and based on media reports | ||||
Indiabulls Real Estate
Indiabulls Real Estate (IBREL), which is the business of construction and development of real estate, filed the draft prospectus of its subsidiary, Indiabulls Power, with the SEBI in mid-July 2009. The company plans to raise funds worth Rs 1,500 crore, which will lead to an equity dilution of 16.98 per cent. On this basis, the value of the power subsidiary works out to about Rs 8,800 crore. This in turn is equivalent to about Rs 97-100 per share of IBREL, after accounting for IBREL’s post-IPO holding of 59.3 per cent and applying a holding company discount of 25 per cent.
Analysts estimate the value of Indiabulls’ real estate business at about Rs 200 per share, which along with Rs 100 for the power business translates into per share value of about Rs 300 for the entire business.
| INDIABULLS POWER | |
| Planned capacity | 6,615 mw |
| Completion date | By September 2013 |
| Total Cost (Rs cr) | 31,052 |
| Current capacity | NIL |
| Description | Coal-based |
| Funding | Yet to be arranged |
| Fuel sourcing | Allotted partially |
| Comment | First plant in September 2011 |
Meanwhile, Indiabulls Power currently does not have any operational capacity and concerns are raised over its experience and execution capabilities. This is also seen as a risk by many analysts. On the positive side, the company has tied up for the debt to the extent of Rs 8,560 crore. It has also placed contracts for EPC work and tied-up long-term power supply agreements for about 40 per cent of its planned power capacity of 6,615 mw. Besides, coal linkages for nearly 4,000 mw have also been tied-up (or a letter of assurance received). The proceeds of the issue however, will be used for its two projects having combined capacity of 2,655 mw. As on March 31 2009, the company had a networth of about Rs 2,300 crore, including cash balances of Rs 646 crore. Thus, part of the remaining funding needs is seen coming from internal accruals. Regarding the commissioning schedule, about 675 mw is expected around September 2011, with the remaining seen going on stream between 2012 and 2013.
For now, while real estate stocks have risen in the last one month (BSE Realty is up 40 per cent), IBREL too has risen by 42 per cent to Rs 255 currently. Analysts believe that some of the gains arising from value-unlocking through the IPO of Indiabulls Power are already reflecting in the valuations. However, they also believe that a lot will depend on the actual valuations accorded to the power subsidiary at the time of listing, which in turn will depend on various factors like progress of different projects and quantity of merchant power sales among others.
GMR Infrastructure
GMR Infrastructure, which has a presence in different verticals of infrastructure like airports and roads, also has big plans in the power sector. The company’s 100 per cent subsidiary, GMR Energy, already has operational capacity of 808 mw and is planning to increase the same to about 5,000 mw by the end of 2012.
Analysts value the GMR Infrastructure stock at about Rs 120 per share on the sum-of-the-part (SOTP) basis. This includes about Rs 38 per share for the power business, based on the discounted cash flow (DCF) method for its power projects. However, they also believe there is scope to unlock value provided the company comes out with GMR Energy IPO. Their assumptions are after taking a conservative Rs 3.5 crore capital cost per mw. On this basis, the value of GMR Infrastructure’s stake in GMR Energy works out to Rs 70 per share, which is after applying the 25 per cent holding company discount.
| GMR ENERGY | ||
| Planned capacity | 4,200 mw | |
| Completion date | By 2012 | |
| Total Cost (Rs cr) | 18,900 | |
| Current capacity | 808 mw | |
| Description | Coal & gas based | |
| Funding | Completed for 1,020 mw | |
| Comment | Most of its fuel linkages are | in place |
Overall, in case of listing of power business additional Rs 30-35 per share of value can be unlocked for the existing shareholders of GMR Infrastructure. Besides, valuations could be higher on two counts. Firstly, GMR Infrastructure has a 100 per cent stake in a Singapore-based 800 mw power generation project. Secondly, the GMR group has a 50 per cent stake in InterGen, which has an operational power generation capacity of 7,600 mw. Analysts believe if both (or either) are integrated with GMR Energy, these could further boost valuations.
Jindal Steel & Power
Despite concerns over the steel sector, Jindal Steel & Power (JSPL) has been able to report an over 100 per cent rise in consolidated net profits for 2008-09 as well as June 2009 quarter. Thanks to the contribution from its power business, the same has reflected positively on its stock which has also done well. Apart from its core business of steel where it has a 3 million tonne capacity, the company currently also has power generation capacity of 1,000 mw (operational) under its wholly owned subsidiary, Jindal Power. This subsidiary is further planning to add 2,400 mw of new capacity, which will enhance the total to 3,400 mw by the end of 2013.
JSPL has plans to come out with an IPO of its subsidiary during the current financial year to part finance its power expansion plans. Going by the market capitalisation to per mw valuations method, the per share value of the power business works out to about Rs 880 per share of JSPL. On a DCF valuation method basis though, analysts value the power busines