Power Companies leading the Renewed IPO Buzz
Yes, the buzz is back and testing markets and testing mettle of individual investors. Three power sector companies, viz. Adani Power, Indianbulls Power, and NHPC, are in fray to get investors money. I had expressed my thoughts about Reliance Power IPO. Let us revisit some of the few tidbits in the context of this latest buzz.
Adani Power was priced in the range of Rs. 90 to Rs. 100 per share. It completed the subscription period and based on the NSE data; it was over subscribed by 20 times. My viewpoint is, its the herd mentality and craze continues. We individual investors never learn our lessons.
- This IPO is expected to fund the two out of four ongoing power projects. It has no operating history as of today.
- Since it is still under development, it does not have any revenue sources. On what basis was the price range set at Rs. 90 to Rs. 100. I am sure this is being valued at more than 30 P/E ratio (or perhaps even more) based on projected first two years of earnings.
- There will be a long wait before the company can have any positive cash flow. Breakeven in power sectors are longer than four to five years. This assumes projects complete on time.
- With all this risk I cannot fathom the pricing and valuation that we individual investors have to pay for IPO? Does it make any sense?
Indiabulls Power is another IPO that is in making and expected to hit market soon. In relative terms, it will be at a little disadvantage because Adani IPO pulled in large money out of investors, and hence available base will be relatively smaller.
- Parent company, Indiabulls Group, operates more than 100 subsidiaries, all from New Delhi. Quite intriguing, isn’t it?
- The company is showing earnings and dividends. Since these are still under development, I fail to understand where are the revenues coming from?
- Here again, it does not have any operative history and experience. All of its five development projects are expected to start coming online in second half of 2012, which is three years from now. The company will have to take debt to sustain itself until then or longer if projects get delayed. After that another three to five years for company to breakeven and have positive cash flow.
National Hydro Power Corporation (NHPC) is the third Power IPO expected to open in early August 2009. NHPC is Indian government’s public sector undertaking that primarily focuses on hydro-based power plants. The expected price range per share has been set at Rs. 30 to Rs. 36.
- It has an experience, it has a growing revenue source and it has demonstrated. Its EPS for last three years is Rs. 0.96 (2009), Rs. 0.97 (2008), and Rs. 0.87 (2007).
- The P/E ratio of is in the range of 31 to 37.
- In general, Hydro power plants are relatively more capital intensive on per MW basis than thermal power plants. They also have higher gestation period.
- While its fuel cost are practically nil, these plants have high risk of predictability for operational performance because of vagaries of water levels and monsoon. Therefore, these plants take relative more years to break even and generate positive cash flow.
Question is…
The existing well established, highly profitable, and extremely well run NTPC is available at lower valuations of approximately 22 P/E ratio based on 2009 earnings. Both Adani Power and Indiabulls Power have no operating history, and even then they are being priced at 30+ P/E. Agreed they are all potential future growth opportunities. However, individuals buying into these IPO as already paying higher valuations i.e. the future growth has already been priced into these values. Where is the potential for capital growth?
Similarly, the NHPC although profitable is being already priced at 30+ P/E ratio. Do we individual investors really expect to have still higher valuations? To me it looks like herd mentality at its best, everybody is looking to trade higher on speculation.
If you are a sane investor, would you buy NTPC or these new IPOs? What are your thoughts?
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Welcome to the IPO Lottery. Same thing is going on in China as well. People want to buy IPO’s, hang on to it for exactly 1.5 minutes and then sell it off to some other *greater fool*
In the end, them make fools of themselves.
Best Wishes,