Reliance Power - Oversubscription - Allotment - Day 1

Sr.No. Category No.of shares offered/reserved No. of shares bid for No. of times of total meant for the category 1 Qualified Institutional Buyers (QIBs) 136800000 2217736125 16.2115 1(a) Foreign Institutional Investors (FIIs)
1785936090
1(b) Domestic Financial Institutions(Banks/ Financial Institutions(FIs)/ Insurance Companies)
431761545
1(c) Mutual Funds
0
1(d) Others
38490
2 Non Institutional Investors 22800000 160126845 7.0231 2(a) Corporates
125872035
2(b) Individuals (Other than RIIs)
33030990
2(c) Others
1223820
3 Retail Individual Investors (RIIs) 68400000 56208630 0.8218 3(a) Cut Off
52143225
3(b) Price Bids
4065405

Future Capital - Subscription/Allotment Chances

Sr.No.	Category	No.of shares offered/reserved	No. of shares bid for	No. of times of total meant for the category
1	Qualified Institutional Buyers (QIBs)	3853680	135085872	35.0537
1(a)	Foreign Institutional Investors (FIIs)		120626344
1(b)	Domestic Financial Institutions(Banks/ Financial Institutions(FIs)/ Insurance Companies)		14198128
1(c)	Mutual Funds		0
1(d)	Others		261400
2	Non Institutional Investors	642280	9089080	14.1513
2(a)	Corporates		2460704
2(b)	Individuals (Other than RIIs)		6605928
2(c)	Others		22448
3	Retail Individual Investors (RIIs)	1926840	29476152	15.2977
3(a)	Cut Off		28073592
3(b)	Price Bids		1402560

J Kumar Infraprojects IPO Analysis

J Kumar Infraprojects (JKIL), promoted by Jagdishkumar M Gupta and his family, is a small civil engineering company focussed on construction of roads, flyovers, civil construction of buildings, irrigation projects and piling works. Operations are largely confined in Maharashtra and to a large extent in Mumbai. The company is a registered contractor with various government agencies.

JKIL had executed transportation contracts totaling Rs 83.95 crore and civil construction work amounting to Rs 13.78 crore end March 2007. The biggest project executed was the construction of a flyover covering Kalyan Naka junction to ST Depot junction in Thane District amounting to Rs 21 crore. The company has executed some irrigation projects in the Vidarbha region. Designing and construction of four flyovers at Dr Babasaheb Ambedkar Marg in Mumbai with project cost of Rs 111.90 crore is the biggest project in its unexecuted order backlog. This project was bagged by the 50:50 joint venture with Nagarjuna Construction Company (NCC).

About 69% (37% from road, and 32% from flyovers) of the revenues were from transportation projects in the six months ended September 2007. The share of the relatively better margin civil construction was 18% and of high margin piling business about 7%.

The current IPO is to fund the purchase of capital equipments, meeting working capital requirement and to achieve the benefits of stock-exchange listing. Purchase of Rs 50.84-crore capital equipment will be completely funded from the proceeds of the issue. About Rs 18 crore of the issue proceeds will be used to meet working capital requirement.

Strengths

Order book was Rs 461.15 crore end November 2007. Orders included new contracts and unfinished contracts. The current order book translates into four times the financial year ending March 2007 (FY 2007) revenue, providing strong revenue visibility.

Piling contracts is a high-margin business. Efforts to add another four piling rigs to the current fleet of 11 piling rigs using IPO proceeds are part of the scaling up operations. Contribution of piling operations to total revenue was about 7% in the half year ended September 2007 and FY 20'07 compared with just 4% in FY 2006 and nil in FY 2005. Moreover, the piling operation is also devoid of geographical-concentration risk. If the piling contracts business, a niche segment, can be scaled up, margin can improve.

Weaknesses

As the nature of contracts handled are not very complex, there is strong competition with lots of operators. This and the small size of operations is a concern. The ability to move up to higher ticket and complex jobs has to be seen.

Most of the construction operations are centered in Mumbai or Maharashtra. The geographical concentration raises concern on order flow, linked to policy, political and financial environment in the state.

The share of low-margin transportation projects in the current order book is over 78%.

Valuation

JKIL's sales were up 391% to Rs 112.66 crore and net profit was higher by 642% to Rs 8.01 crore in FY 2007. On post-issue equity capital of Rs 20.72 crore, EPS for FY 2007 works out to Rs 3.9. At a offer price of Rs 110 to Rs 120, P/E is 28.2 to 30.8 times. In comparison, industry peers Roman Tarmat, PBA Infrastructure and Supreme Infrastructure are available at a PE of around 20 times FY 2007 earning.

Grey Market - EMAAR MGF, Cords Cable, J Kumar Infraprojects

 Future Capital Holdings 700 to 765 590 to 595


Reliance Power 405 to 450 360 to 370


SVPCL 42 DISCOUNT


Porwal Autocomponents 75 DISCOUNT ( Listing Today!)


J. Kumar Infraprojects 110 to 120 25 to 30


Cords Cable Ind. 125 to 135 35 to 40


Emaar MGF 725 to 850 400 to 450

It's all about Power!

Power utility stocks have seen good gains in recent months, further upside depends on their ability to deliver on promises.

Power utility stocks have been a hit with investors since the last few months with stocks of nearly all major companies beating the BSE Sensex by a good margin.

The outperformance comes as a surprise, considering that stocks of power utilities are typically valued on a price-to-book value basis, since they earn fixed returns and a steady or a predictable cash flow and, there has been no unusual jump in their earnings recently.

Traditionally, stocks of power utilities have been valued between 1-2 times their respective book values. In terms of costs, including fuel expenses, interest and depreciation, all of it is pass-through and are passed on to the consumers so as to ensure that power utilities earn the fixed rate of return of 14 per cent on the shareholders funds (return on equity or RoE).

The conventional method of valuations though now seem to have gone for a toss as most of these companies are trading at about 4-5 times their respective book value and, their PE multiples are now at over 30 times FY07 earnings.

What's changed? To know the factors responsible for this up move and to know if there is still power left in these stocks, read on. Much of the action was started with the announcement of ultra mega power projects (UMPP), followed by the controversy over nuclear power in the country.

By that time, the market was convinced that the government is not only aiming for the ambitious capacity additions of 78,577 megawatt (MW) during the Five Year Plan ending 2011, but also, a large part of it is very likely to be achieved.

Their belief was further fuelled by the government's initiatives such as allocation of coal mines and allowing merchant power. The listing of Power Grid at premium valuations instilled more confidence among investors.

However, the most recent trigger in the sector, says Deepak Jasani, head of retail research, HDFC Securities, "For the last few months, there has not been any fresh trigger for the re-rating of the power utility sector apart from the hype built over the Reliance Power IPO. Re-rating of stocks in this space is happening based on relative valuations with respect to various parameters like capacity (existing and planned), book value, etc, when compared with the Reliance Power valuations."

Relative parity The forthcoming IPO of Reliance Power (RPL) has had a big rub-off on valuations. To give some numbers, based on Reliance Power's IPO price, at lower-band, of Rs 405 per share, the market is valuing the company at Rs 91,530 crore, in terms of market capitalisation. At the IPO price, its price to book-value per share works out to over 7 times.

There is nothing exceptional in the case of RPL, which justifies a premium valuation over others. Analysts say, for the six projects totaling 7,060 MW and estimated to cost Rs 31,789 crore, for which the funds are being raised in the IPO, the RoE for RPL is unlikely to be significantly higher than the usual 14 per cent. That's even after considering some upside potential in the case of the 3,960 MW Sasan-based ultra-mega power project and merchant power capacity.

Now compare this with NTPC, India's largest power producer and the sixth largest coal-based producer in the world, which currently has an installed capacity of about 28,000 MW (including about 1,000 MW through joint ventures) and a RoE of 14.9 per cent (for FY07). For NTPC, the price to book-value works out to 4.6 times.

Notably, NTPC has already undertaken various projects, which will see its capacity increase to over 50,000 MW by 2012. And by 2016, its capacity should stand increased to over 75,000 MW. Notably, NTPC's cash generation too, estimated at over Rs 10,000 crore in FY08 (and likely to grow at over 10 per cent annually), is sufficient to fund its growth plans, with little contribution from loans.

This gap in the valuations not only exists vis-à-vis NTPC, but to a large extent with other players as well. So, either RPL is over valued or the other power utility stocks are under-valued. Notably, as other stocks are catching up, at this point in time, based on historical valuation methods (price to book-value), all of them appear to be over-valued.

Says Srinivas Macha, vice president, Aranca, a global investment and research service provider, "In India, there seems little justification for such rich valuations as there is very little to show by way of performance. All the issues that dog the power sector in India such as high technical and commercial losses at 50-60% -- among the highest anywhere in the world, less than 50% of realisation of all power that is generated, inept state-run utilities with poor record of recovery, populist measures such as subsidies and so on, persist." While things are improving, it's still a long way to go.

Growth story There are other things that seem to partly support the rising valuations. For one, the power sector is now being perceived as a growth sector, especially after many power projects have started to roll. In each of the last three five-year plans viz. 1992-97, 1997-2002 and 2002-07, the average total capacity addition has been 51.33 per cent of targeted capacity.

But, in the current plan (2007-12), key plant equipment (boiler, turbines and generators) for over 60% of the planned addition of 78,577 MW has already been ordered. So, there is greater visibility in terms of what is aimed and what is likely to be achieved. These developments too are playing positively on stock valuations, as it should result in higher earnings growth for companies.

Among other key fundamental changes that are responsible for the rally in the stocks of power utilities, says Amitabh Chakraborty, president, equity, Religare Securities, "The power utility stocks have been re-rated because of huge demand-supply mismatch and increased attention from the government. Utility returns were earlier capped and linked to the bank rate. So, there were no incentives to perform. Now, there is potential to earn higher returns by setting up merchant plants. Secondly, the ultra-mega power plants provide scale of economies for new power generation companies, and gas availability has also improved. Overall, all this is good news."

Adds Krishna Kumar, fund manager and head of research, Sundaram BNP Paribas Mutual Fund, says "developments such as better fuel linkages, de-blocking of the coal mines for the private and public sector power generation companies and allowing merchant power generation, have improved the outlook of these companies."

Not to forget, India is a power deficit country, especially when it comes to the energy requirement of the country. In the light of rising GDP thus, there is a long way for power generation companies to scale up their businesses. This has also led the private players to share the growth, and their participation is seen rising.

Merchant power The focus on merchant power, where power producers can earn higher returns compared to the traditional 14 per cent RoE, is also viewed as a key development, as it provides greater incentives to set up capacities.

With respect to merchant power, power producers can sell power at market determined prices, which in current scenario, may go up to as much as Rs 7 per unit on spot-basis, as compared with Rs 1.50-2.50 per unit, thanks to the huge demand-supply gap.

On the flip side, while the equation looks favourable now, it could change in a situation where supply exceeds demand and, buyers refuse to pay a high premium. Secondly, since the profitability will depend on market dynamics, besides, offtake commitment and timely payment by the buyer (of power), the lending community (banks, institutions, etc) too needs to be comfortable with lending to such projects.

Simply because, in case of merchant power plants, the risk will tend to be relatively higher. And due to such reasons, analysts believe that it will be difficult for any company to have an exposure of more than 15-20 per cent of their power generation portfolio, in merchant power plants.

Says an analyst, "For a company like NTPC, dedicating a 2,000 MW plant on merchant basis seems possible, as it has a strong balance sheet and equally robust profits, which can be used to service the debt, should anything go wrong. But, for a smaller company, debt servicing could become an issue in such an event."

In the best case scenario (and considering a RoE of 25 per cent for merchant power plants), the blended RoE is unlikely to go beyond 17 per cent. In short, profits are unlikely to rise significantly, purely based on this factor alone and, will hinge largely on the fresh addition to existing capacity.

Is the power run over? While there's no doubt that these various developments are positive for the sector, the run up in share prices also suggests that the market seems to have already factored in the growth that is expected to accrue over three to five years from now.

But, there are many who continue to be bullish on the sector, Says Amitabh Chakraborty, "We are positive on the sector." While some others believe that current valuations are either fair or on the higher side, they also suggest that further moves will depend on the listing of RPL and subsequent moves.

As per analysts estimates, factoring in the future growth plans of the bigger companies, the price to book-value for NTPC works out to around 2 times, while for Tata Power its about 1.8 times and for Reliance Energy (only power business) its about 1.6. These are close to fair values as per traditional valuation methods.

To sum up, in the short-to-medium term, there is little upside, if any, left from here on. But, going forward (long run), further upsides should come based on events including companies securing new projects, companies reporting satisfactory progress with regards existing projects and the government continuing to give attention to the sector.