Power Finance aims for $225 million IPO

The financing company owned by the Indian government announces funding plan as the Mumbai benchmark index sets a new record.
State-owned Power Finance Corporation has confirmed its intention to raise up to $225 million from the first sizeable initial public offering in the Indian market this year.

The announcement came as the Mumbai benchmark index closed at a new record high after it finished above 14,000 points for the first time on Friday. The resumption of the upward trend in the secondary market after about a month of volatile trading may help instil confidence with regard to new issuance, although people familiar with the pre-marketing of Power Finance say it has also made investors highly conscious that the deals be priced fairly.

The Mumbai index added 0.5% on Monday to close at 14,129 points after hitting an all-time high of 14,202 points earlier in the day. The index has rallied 60% from its low of 8,799 points in mid-June.

Power Finance, which provides financing for Indian power and infrastructure projects within both the public and private sectors, will sell 117.3 million new shares, or 10.22% of its enlarged share capital, at a price between Rs73 and Rs85 apiece. This will give a total deal size between Rs8.56 billion and Rs9.97 billion ($193 million to $225 million).

According to a draft listing document filed with Indian regulators, the offer price represents a discount between 7.8% and 25% to the companyÆs net asset value of Rs67.7 per share as of the fiscal year ending March 2006. However, the asset value will increase in the current fiscal year as profits are added in and based on current estimates, the IPO will be priced at a discount to NAV, a source familiar with the offering says.

In the six months to September 2006, the company posted a net profit of Rs4.01 billion ($90 million), compared with a profit of Rs9.75 billion in the full year ending March that same year.

Operating income has grown at a compound annual growth rate of 9.45% in fiscal 2002 to 2006 and loan assets expanded at a CAGR of 21.28% in the same period. The return on average net worth (NAV plus reserves for bad and doubtful debts) has, however, fallen to an annualised 12% in the first half of fiscal 2007 from 15.6% in fiscal 2006 and 16.85% in fiscal 2005.

ôInvestors like the company because it is a play on infrastructure within the power sector which has been hibernating for the past few years but is now expected to take off,ö the source says.

According to the listing document, the company intends to diversify its portfolio by starting to fund coal, lignite, and oil and gas companies as well as infrastructure agencies that transport and handle fuel for power projects. It is also looking to lend to power projects using non-conventional energy sources such as wind farms and small hydro and bio-mass projects.

Separately, it is in the process of incorporating a venture capital fund - the India Power Fund - that will also invest in power sector projects. Power Finance has committed Rs2 billion ($45 million) to this fund, which is expected to become operational in the near future. Oriental Bank of Commerce has agreed to invest Rs100 million.

Enam Financial Consultants, ICICI Securities and Kotak Mahindra will be joint bookrunners for the IPO, which will be targeted primarily to domestic investors but will be open to foreigners who are qualified institutional buyers (QIBs). The offer will be open between January 31 and February 6.

Of the total shares on offer, 57.4 million shares will be sold to QIBs, including mutual funds, 17.2 million will go to non-institutional investors, 40.2 million to retail investors and the remaining 2.5 million will be set aside for company employees.

The deal will be the first divestment of a wholly-government owned company in India since 2004 when the government sold $2.3 billion worth of shares in Oil and Natural Gas Co in what still counts as the countryÆs largest IPO. In the same year it also divested part of National Thermal Power and Gas Authority of India.

Power Finance is only a quasi privatisation, however, as the government isnÆt actually selling any shares. It will also continue to hold the vast majority of the shares. As a result of the dilution from the new share issue, its stake will fall from 100% to 89.8%.

The government had initially planned to sell part of its shareholding in the company, but withdrew those plans because of a lack of consensus between the government coalition partners. As a result, the launch of the offering was delayed from last year and the deal size has been cut from an original target of about $300 million.

Also in the market at the moment is property developer Akruti Nirman, which started taking orders for its $72 million to $82 million IPO yesterday. The deal, which is jointly led by JPMorgan and Enam, comprises 6.7 million shares which are offered at Rs475 to Rs540 apiece. The books will close on January 19.
¬ Haymarket Media Limited. All rights reserved.
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