Indiabulls Power secures anchor investors ahead of IPO

Indiabulls Power, a spin-off from Indiabulls Real Estate, on Friday sold a portion of its initial public offering to eight anchor investors before the official kick-off of the deal today. The company, which is trying to raise up to Rs15.29 billion ($327 million), said it had sold the maximum allowed 30% of the tranche reserved for qualified institutional buyers (QIBs), or 18% of the total IPO, to the anchor investors at a price of Rs45 a piece.

The price is equal to the top of the indicated IPO range of Rs40 to Rs45, which is likely to send a positive message to other investors about the anchor investors' confidence in the company. While so far only two other Indian companies -- Adani Power and Pipavav Shipyard -- have sold shares to anchor investors prior to their IPOs since this became possible in June, the price agreed with the anchors tends to set a benchmark for the forthcoming bookbuilding by other investors as well.

According to a statement, approximately 21 million shares, or 34% of the shares available to anchor investors went to Copthall Mauritius Investment, while BNP Paribas and the Nomura India Investment FundMother Fund (together with a trust company) bought 10.5 million and 10.8 million shares respectively. The other anchor investors were Indea Capital, the Norwegian government petroleum fund, Credit Suisse Singapore and Macquarie Bank.

A key reason for investors to come in as anchors is that they are able to buy a more meaningful stake in the company than what they can typically do through the online bookbuilding where the shares are allocated on a pro rata basis. In return for getting the prioritised allocation, anchor investors have to put down a 25% deposit when they submit their orders (versus 10% if they subscribe through the regular online bookbuilding) and they are subject to a 30-day lock-up.

Indiabulls Power, a greenfield operation that was established in 2007 and has five thermal power projects under development, is offering to sell a total of 339.8 million new shares, which will account for 17% of the enlarged share capital. The deal also includes an overallotment option of about 15% of the deal, which could lift the total proceeds to as much as $376 million.

As usual, 60% of the deal will be targeted at QIBs, 30% at retail investors and the remaining 10% will go to non-institutional buyers, such as corporate and high-net-worth individuals.

The subscription will open today and run until Thursday. This is a day longer than the usual three days, but only because Tuesday is a holiday in India. Morgan Stanley is acting as the sole bookrunner.

One source noted that the Indiabulls group has a track record of pricing their equity transactions at investor-friendly levels and says investors like the management. So far, the institutional feedback at least has also been pretty positive.

However, not everyone is convinced about the merits of this deal. One analyst points to the substantial execution risk involved since the company has yet to complete its first plant. Sure, Indiabulls Power is coming to market at a cheaper valuation than more established players like Tata Power or NTPC (a government-controlled power generator focusing on nuclear power), but in his view it is too "premature" for the company to come to the market at this point.

"There are a lot of project milestones that it has not yet completed," the analyst said. Taking this into account, he estimates that the top end of Indiabull's IPO range is equal to about 2.3 times the company's book value. This compares with 3.5-4 times for Tata Power and NTPC.

However, the company was established to capitalise on opportunities in the Indian power generation sector, which is being driven by current and expected future demand-supply imbalances in India. And that hasn't really changed since the company was launched.

The five thermal power projects currently under development will have a combined installed capacity of 6,615MW. In addition, the company is also proposing to develop four medium-sized hydropower projects with a combined capacity of 167MW.