Home BusinessPower IPOs: Pricey valuations
If power companies want their IPOs to be reasonably successful, they will have to price them well.
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The list of power companies rushing to raise money through the initial public offer (IPO) route to fund their growth is getting longer. However, investor interest (especially that of retail investors) is waning and returns have been below par.
While three companies raised as much as Rs 11,000 crore in the last four months, Jindal Power last week announced plans to come out with a Rs 10,000-crore IPO in January 2010. If successful, it will be the country’s second-largest IPO after Reliance Power’s Rs 11,563 crore offer in January 2008. Going ahead, power companies from groups such as Sterlite, GMR and Lanco are also likely to tap the primary market.
On the other side, the stocks of Adani Power, NHPC and Indiabulls Power, which came out with IPOs in the last four months, are 3-27 per cent below their respective IPO prices. Notably, the three IPOs were subscribed 15-24 times, mainly due to strong demand from qualified institutions.
In fact, the retail portion of Indiabulls Power’s offer was undersubscribed, even as the total oversubscription was nearly 16 times. The fourth power IPO, from JSW Energy, which closed on December 9 and is yet to list on the bourses, barely scraped through. It was subscribed 1.68 times, but again with strong support from institutional investors such as LIC (Rs 2,000 crore) and ICICI Bank (Rs 700 crore), said analysts.
So, why are retail investors shying away even though institutions have shown a strong interest in IPOs of power companies?
Manish Sonthalia, senior VP, Research & Strategy, Motilal Oswal Securities, said, “The broad picture for the power sector is good. Institutional investors are betting on the companies’ executing capabilities.” With merchant sales forming a large portion of total power sales for many companies and there being a lack of predictability about input prices, the risks are relatively high. Sonthalia says the valuations have also been on the expensive side.
Apart from good fundamentals, there are a few key things that determine the success of an IPO, including the market sentiment prevailing at the time of the offer and how much a company leaves on the table for investors. While sentiments are beyond control, participants will have to ensure that there is no bunching of big IPOs to avoid strain on liquidity. Additionally, if power companies want their IPOs to be reasonably successful, they will have to price them well.