Reliance Power prices record IPO at top

The greenfield Indian power producer attracts $188 billion worth of demand and close to five million investors.
Reliance Power has priced its initial public offering at the top of the range at Rs450 a share after investors showed complete confidence in the ability of the Reliance Anil Dharubhai Ambani Group to deliver on its plans for the company.

Although it is still a greenfield company that wonÆt generate any power or revenues for another two years, the strong investor support allowed the spin-off from Reliance Energy to raise Rs117 billion ($3 billion). Of the total, $369 million worth of the shares were bought by the companyÆs promoters as agreed before the offering.

When the deal closed on Friday, investors other than the promoters had subscribed for 73 times the shares available to them, committing a total of $188 billion worth of orders, of which $126 billion came from institutional investors. This makes it the most popular Indian IPO ever with demand exceeding the order amount for the previous top five deals combined û an impressive feat not only because of its greenfield status and the large execution risks, but also because the subscription period coincided with a sharp decline in the Indian market. Over the past five days, the benchmark Bombay Sensex Index has lost more than 1,800 points, or 8.7% of its market value, wiping out all the gains made so far this year.

Before Reliance Power, the most popular Indian IPO in terms of subscription value was Mundra Port and Special Economic Zone, which attracted $52 billion of demand for its $450 million listing in November last year. Power Grid Corporation, Reliance Petroleum, Idea Cellular and Power Finance Corporation were also part of the top five.

It was clear that the deal was hot immediately after the books were opened with investors committing enough money to cover the offering twice over in the first minute. After the first day, the IPO was already 10 times covered.

ôThe key attraction was the brand name,ö says one source, who adds that the deal is believed to have set a global record with 4.98 million participating investors.

In terms of the total order amounts it lags Industrial and Commercial Bank of ChinaÆs dual-listing IPO in October 2006 which attracted just under $300 billion from institutional investors and $55 billion from retail investors for the H-share portion alone. Including the $85 billion committed for the A-share tranche, ChinaÆs largest state-owned lender saw total demand in excess of $430 billion.

However, at $19.1 billion (pre-greenshoe), ICBCÆs IPO was also significantly larger than the Reliance Power offering. The latter is still the largest Indian IPO ever û ahead of property developer DLFÆs $2.25 billion deal in June last year. It will also be among the 10 largest listed companies in India with a market capitalisation of about $26 billion at the time of listing.

The power generator offered 260 million shares, or 11.5% of the company, at a price of Rs405 to Rs450 per share. The promoters bought 32 million of the shares, or 12.3% of the deal. Of the 228 million shares on offer to investors other than the promoters, 60% went to qualified institutional investors, 10% to non-institutions such as high net-worth individuals and the remaining 30% to retail investors.

According to data published on the National Stock Exchange of India, the QIB portion was 82.6 times subscribed, non-institutional investors asked for 190 times the shares set aside for them and the retail tranche attracted orders for 14.9 times the number of shares available to them. Retail investors were granted a discount of Rs20 per share (or 4.4%) to the price paid by institutional investors, which will increase their chance for a profit when the shares start trading in the week of February 7.

Reliance Power will be one of the largest power generators in India when its 13 planned plants come into operation and analysts say no other Indian power generator company will be able to show the same rapid growth rate in the coming seven to eight years. According to the listing prospectus, the first project (Rosa Phase I) is due to start generating power and revenues in December 2009 with the other 12 plants scheduled for completion at a staggered pace until April 2016.

According to projections made in IndiaÆs National Electricity Plan, IndiaÆs power demand will grow at an average annual rate of 9% between 2007 and 2012 and at 7% in the five years to 2017. The company says it plans to develop additional power projects on top of the 13 that are currently in the works to meet this demand increase and it has already submitted bids for four hydroelectric power projects in the state of Himachal Pradesh. It also intends to invest in overseas opportunities that are a strategic fit with its business.

For investors, the reputation and track record of the Anil Ambani group is likely to have been as important as the future business plans when deciding whether to buy in or not. They also didnÆt seem concerned that the company was being offered at a premium to its two key comparables NTPC and Tata Power based on the market value per megawatt. Adding up the installed capacity of 28,200 megawatt at all of Reliance PowerÆs 13 plants that are planned to come on stream over the next seven to eight years, the deal was priced at Rs36 million/MW, which compares with less than Rs30 million for the other two, based on their current installed capacity, according to an India-based analyst,.

The same analyst notes that the perception is that the controlling shareholder will make sure people wonÆt lose money on this spin-off. But they were also counting on the familyÆs contacts and negotiation skills to ensure the listing candidate will be able to realise its plans.

Speaking at a press conference in Mumbai over the weekend, Anil Ambani, who is also the chairman of the listing candidate, said the IPO valuation of Reliance Power will push the market cap of the entire group to about $100 billion compared with $4 billion when it was carved out of the larger Reliance empire in June 2006, Indian media reported. The group was split in two following a fall-out between Anil and his older brother Mukesh.

Other companies in the Anil Ambani group include Reliance Communication, Reliance Capital, Reliance Natural Resources and Reliance Energy.

The source says he expects the demand for Indian IPOs to remain solid for the next few deals at least, although order amounts are unlikely to be as aggressive as for Reliance Power.

Last week, Future Capital Holdings was able to price its IPO at the top of the Rs700 to Rs765 offering range for a total deal size of Rs4.9 billion ($125 million) after investors asked for 133.4 times the shares on offer. Future Capital is the financial services arm of IndiaÆs Future Group, which focuses on consumption-led businesses. Its flagship company, Pantaloon Retail (India), is the promoter of Future Capital. Bookrunners on the deal were Enam Financial Consultants, JM Financial, Kotak Mahindra and UBS.

Reliance Power was brought to market by ABN AMRO, Deutsche Bank, Enam Financial Consultants, ICICI Securities, JM Financial, JPMorgan, Kotak Mahindra and UBS.
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