The pricing was no great surprise given that the deal was only 1.5 times covered overall when the three-day subscription period ended on Wednesday and the fact that a majority of the orders were submitted at the low end. The final price of Rs240 per share (off a range of Rs240 to Rs255) also corresponded to the price paid by a group of six institutional investors who bought a combined 5% stake (based on the post-IPO share capital) through a placement shortly before the share offering to the market, and the IPO investors would have seen no real reason why they should pay more.
That the deal got done at all must be considered an achievement though, given the negative sentiment surrounding the Indian stockmarket, which has lost 29% of its value year-to-date and two days ago closed at a new 2008 low. Reliance Power, a greenfield power producer that went public in January, is also currently trading 43% below its IPO price after adjusting for a three-for-five bonus issue earlier this month, and having lost money on one newcomer in the sector, many investors were simply not prepared to take a closer look at a second one. This was certainly true in terms of retail investors, who subscribed to only 20% of the shares that were set aside for them.
The 60% tranche aimed at qualified institutional bidders was 2.2 times covered, however, while the 10% of the deal set aside for non-institutional investors, including corporate and high-net-worth individuals, was close to 1.1 times subscribed. Foreign investors accounted for 69.5% of the total bids by QIBs.
The latter category of investors may have been comforted by the fact that KSK EnergyÆs share registry already includes several well-known international names. Macquarie Bank and GE Capital were among the investors who bought the pre-IPO placement and in January Lehman Brothers acquired a 31.6% stake in the company, which will be diluted to 28.4% after the IPO. Their participation would have helped overcome the fact that KSK Energy is a relatively unknown company outside of India û although it did get some headlines in late May when an investor accused Lehman Brothers of having incorrectly marked up the value of its holding in the company in its first quarter results. Lehman has denied the allegations and based on the IPO price and the US investment bank's acquisition price of Rs34.55 per share, it is in fact currently sitting on a paper profit of about $470 million.
Other concerns included the fact that KSK EnergyÆs track record in terms of power plant operation is very modest in relation to its planned expansion. At present, the company has three operational power plants with a combined generation capacity of 144 megawatts and another two (with a combined capacity of 675MW) under construction. Under its current plans, it will add another eight projects by 2013, bringing its total capacity to 8,993MW. Needless to say, such aggressive plans imply a lot of execution risk, and several India-based analysts advised their clients to avoid the stock or to approach it with a long-term view.
ôConsidering the long-term execution tenure of the projects, risk of delays, financing risk, interest rate risk and execution risk would remain,ö say analysts at Keynote Capitals Research in a note published last week.
Indeed, the company itself acknowledged in the listing prospectus that it has ôlimited experience in developing and operating large power projects and managing the high level of growth (it) projects for (its) business.ö
The general backdrop for IndiaÆs power industry remains favourable, however, with significant investments expected in the next 10 years to overcome chronic power shortages. As part of its economic plan for 2007-2012, the government recommended a capacity addition of just over 78,500MW and a working group has suggested another 82,200MW be added in 2013-2017. That said, the domestic power producers have been under pressure in recent months as a result of the surge in the price of coal û a commodity that is a common fuel for Indian power plants. Of KSK EnergyÆs 12 existing and planned projects, seven are coal-fired.
KSK Energy, which is ultimately controlled by KSK Power Ventur û a power-focused investment company listed on LondonÆs Alternative Investments Market - specialises in the development of small-scale captive plants which it typically owns in a joint venture with the company that will be using most of the power from the plant. This strategy, according to the companyÆs own account, has helped reduce its capital expenditure and has also resulted in ôstrong and long-term relationshipsö with its customers, who include players like Lafarge India and Zuari Cement. Analysts note though that it has no off-take agreements in place for most of its planned projects, which means the selling price for the electricity generated by these plants remains uncertain.
KSK Energy sold a total of 34.611 million new shares, which is equal to 10% of the enlarged share capital. According to a source, the final price values the company at 4.9 times its estimated 2008 book value, which some analysts say looks pricey compared with peers like Tata Power and Lanko Infrastructure, which trade at about 3.5 and 4.5 times respectively. However, KSK EnergyÆs equity valuation has essentially halved compared with plans earlier in the year for a deal that would result in a market capitalisation of about $4.1 billion. The sliding equity markets forced the company to tone down its expectations, however, and based on the actual IPO price, it will now have a market cap of $1.94 billion at the time of listing.
The deal was jointly arranged by Edelweiss, IDFC-SSKI, Kotak Mahindra Capital, Lehman Brothers and Morgan Stanley, with Axis Bank acting as a co-bookrunning lead manager.
The most recent Indian IPO to raise at least $100 million was Rural Electrification Corporation (REC), which raised $410 million in late February after fixing the price at the top of the range. The company, which provides financing for various projects within the power sector, is currently trading 15% below its IPO price.
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