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IPO Review: A2Z Maintenance & Engineer...
A2Z Maintenance & Engineering Services (A2Z), in which renowned investor Rakesh Jhunjhunwala holds about 21 per cent stake (on pre-IPO capital), has come out with an IPO to fund its growth plans. While the company is present in some of the promising businesses, lack of experience in new businesses, intense competition, heavy dependence on ongoing capex for future growth, the highly working capital intensive nature of its businesses and expensive IPO pricing need investors' attention.
A2Z's main business includes the EPC (engineering, procurement, construction) work for the power transmission and distribution (T&D) sector from where it drives almost 92 per cent of its revenue. On the back of opportunities in the sector, this segment has clocked athreefold jump in revenue during the last two years. The company has in-house capabilities in the business and enjoys relatively high operating margins. Its strong order book of `1,292 crore, which is more than one time its FY10 revenue, and opportunities in the T&D space should ensure healthy growth in the near future.
Pillars of growth
Apart from the power T&D sector, the company is also working towards growing in other segments. It has ventured into the renewable energy and municipal solid waste management businesses. Both these businesses hold a promising future on the back of large opportunities in India. Through the proceeds of the issue of `675 crore (excluding the `187 crore offer for sale by existing investors), the company intends to invest in these businesses. For instance, in municipal solid waste management, the company has already made significant progress. It has a total capacity of 5,198 tonnes per day and has presence in several cities in UP, MP, Bihar, West Bengal and J&K. In the renewable energy space, the company has plans for about 145 Mw of generation capacity based on different fuels such as sugar bagasse, rice husk and biomass, most of which the company claims it will commission during 2011. The revenue from these two segments is expected to start accruing over the next two years. Also, due to expectations of relatively higher margins (about 45-50 per cent), they will make a larger contribution to A2Z's net profit and overall growth.
Valuations
On the basis of the existing businesses and the annualised financials of the company, the price to earnings works out to 29 times and price to book 2.5 times, which is very expensive. However, if we account for the revenue and profits coming from the new businesses over the next 2-3 years, the valuations seem reasonable. But, in that case the risk — in terms of execution of these projects and flow of revenues and profits — will remain with the investors. Investors with a high risk appetite and patience may apply. Offer opens on December 8, closes December 10.--
Retail investor limit in IPOs doubled
C B Bhave, chairman of SEBI told reporters in Mumbai that the SEBI board had allowed retail investors to buy shares worth up to Rs 2 lakh through IPOs.
Earlier, the market regulator had, through a discussion paper issued in August this year, proposed to raise the ceiling for retail investors to Rs 2 lakh in public issues.
In the discussion paper SEBI had argued that "retail individual investors, who have the capacity and appetite to apply for securities worth above Rs 1 lakh were constrained from doing so because of the Rs-1 lakh."
The discussion paper also contended that since 35 per cent of the public issue is to be allocated to retail investors, in case of large public issues – with issue size in the range of Rs 4,000-6,000 crore -- the limit of Rs 1 lakh would mean that the issue has to receive a minimum of 150,000 to 200,000 applications from retail category.
Prior to 2005, retail investors could apply for shares only up to Rs 50,000. Later, it was increased to Rs 1 lakh in March 2005.
IPO PIPELINE
| IPO PIPELINE | ||||
|
| Issue size * | 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 repor | ||||
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 business in the range of about Rs 2,500-3,000 per share.
"We are expecting the power business to generate free cash-flow of something like Rs 6,000 crore over the next three years, which means the company is fully funded for the upcoming power projects of 2,400 mw. If it comes with an IPO, it is going to be for the additional capacity, which would be over and above the 3,400 mw. Suppose the company raises funds for additional 3,000 mw, the market will also consider the future capacities," says Eric Martins, metals analyst, Systematix Shares & Stocks.
| JINDAL POWER | |
| Planned capacity | 2,400 mw |
| Completion date | By 2013 |
| Total Cost (Rs cr) | 12,000 |
| Current capacity | 1,000 mw |
| Funding | Yet to be tied up |
| Fuel sourcing | Captive coal linkages |
| Comment | 1,000 mw currently |
Besides, analysts also believe that the valuations could be higher given the 100 per cent proportion of merchant power (current selling price of about Rs 6-7 per unit) and captive coal mines leading to higher operating margins of 80 per cent and return on equity.
However, given that the JSPL stock is currently trading at Rs 3,000, there is limited upside in the near-term given that analysts have valued the company at Rs 3,500 per share on a SOTP basis. So, unless JSPL comes out with the IPO of Jindal Power (or if the fortunes of its steel business improve), the upside seems capped.
Sterlite Industries
Sterlite Industries, a diversified non-ferrous metals producer, is yet another company with big plans in the power generation arena--- it plans to set up power capacities equivalent to about 10,000-11,000 mw in the long-run. Sterlite Industries' power business is undertaken through its wholly owned subsidiary, Sterlite Energy. The company's first plant of 600 mw (of the total 2,400 mw) is expected to be commissioned by December 2009 and hence, will start fully reflecting in revenues from 2010-11 onwards. Notably, a large part of the power produced from the 2,400 mw is expected to be sold on merchant basis, which typically yields higher returns.
"We expect Sterlite Energy to contribute 15 per cent of the consolidated revenues and 21.3 per cent of the operating profits after the full ramp up of the projects in FY11-12," says an analyst of Angel Broking. The analyst has valued the power business at Rs 80 per share (12 per cent of current market price of Sterlite Industries at Rs 628 per share) based on the 2.5 times the price to book value of Sterlite Energy.
However, Rakish Aurora, who tracks the metals sector at Macquarie Securities believes, "If Adani Power can get good valuations for its 6,000 mw, there is a fair chance that Sterlite Industries, too, can unlock shareholder value through Sterlite Energy. The company has plans to commission 2,400 mw and an additional 1,980 mw is in the development stage. Besides, there is a large amount of cash in consolidated books."
| STERLITE ENERGY | |
| Planned capacity | 2,400 mw |
| Completion date | By September 2010 |
| Total Cost (Rs cr) | 10,000 |
| Current capacity | First unit of 600 mw in |
| Description | Coal-based Merchant |
| Funding | Tied up |
| Fuel sourcing | 112 mt is allotted |
| Comment | The company also has a |
In short, there are chances that Sterlite Industries can create more value for its existing shareholders. However, the amount of value-creation will depend on the valuations that Sterlite Energy is able to command at the time of its IPO as well as its capacity addition plans and ability to execute projects in a timely manner.
JSW Energy
JSW Energy, which is promoted by the Sajjan Jindal group of companies like JSW Steel and Jindal South West Holding, filed its draft IPO prospectus with the SEBI on August 14, 2009. The company aims to garner about Rs 3,000 crore through the IPO to fund its future projects in the power sector. JSW Energy currently has 560 mw of operational capacity and plans to add another 3,410 mw by January 2013.
Based on the price to book value (P/BV) of two times, JSW Energy's market capitalisation could be in the range of about Rs 9,000 crore and sounds good news for its listed promoters. The impact would not be large in the case of JSW Steel, which owns just 5.74 per cent in JSW Energy---analysts peg a value of Rs 27-30 per share of JSW Steel for the stake. However for JSW Holding, which holds 19.8 per cent through another subsidiary, Sun Investment, it could benefit from the listing of JSW Energy. Based on the P/BV valuations, the per share value for the JSW Holding could be in the range of about Rs 1,000 per share.
| JSW ENERGY | |
| Planned capacity | 3,410 mw |
| Completion date | By January 2013 |
| Total Cost (Rs cr) | 14,600 |
| Current capacity | 560 mw |
| Description | Coal & gas based |
| Funding | Completed |
| Fuel sourcing | Tied up |
| Comment | Mix of short and long term |
This is after accounting for the 25 per cent holding company discount, but based on the current equity base. JSW Holding is a listed company and its stock currently trades at about Rs 1,053. As far as investment opportunity is concerned in Jindal South West Holding, investors will have to be careful as the stock is very volatile. Also, it is merely an investment company, which holds stake in JSW promoter group companies and does not have any other business.
Besides these five companies, investors can also watch for developments in Bhilwara Energy and Usher Eco Power as they also have IPO plans. Apart from power, there are other sectors as well where companies are looking to unlock value for their shareholders as well as raise funds for expansions, by listing their subsidiaries. Here, companies like Godrej Industries (IPO of Godrej Properties likely), L&T (L&T Finance), Punj Lloyd (owns 22.34 per cent in Pipavav Shipyard) and Reliance Communications (Reliance Infratel) and a few others, find a mention. So, look out for more action on primary markets
