|
|
|
Why Power IPOs are exciting investors?
|
|
Friday, January 18, 2008 |
|
Investor response has been at lightning speed to the initial public offering (IPO) of Reliance Power Ltdthe Rs 11,700 crore issue, the largest thus far in the annals of the Indian capital market, was oversubscribed in a matter of seconds. Several other corporates with a presence in power, including Vedanta, Ispat and Essar, have reportedly lined up IPOs too.
In fact, the monies to be raised via power IPOs in the offing, add up to more than the entire amount tapped in the primary market last year. Does the seeming investor frenzy point at welcome changes on the ground in the vexed, state-dominated power sector which remains mired in runaway losses and routine revenue leakage?
The truth is that the investment norms in power have, at long last, changed for the better, albeit quite recently. Also, there's much scope for efficiency gains and productivity improvement now that power tariffs as a rule need to be determined by way of competitive bids. So there seems genuine cause for greater investor comfort in power, although "irrational exuberance" cannot really be ruled out.
That said, things appear not all hunky-dory on the regulatory front. For instance, when it comes to power tariffs determined on the basis of capital costs, as say for central generating stations, electricity regulator CERC has come up with some onerous conditions. The markedly different norms laid down for different power producers are avoidable; it may well dampen investor interest. The rigorous cap on tariffs selectively clamped by CERC may actually disincentivise supply and artificially prop up returns for other producers.
The legal basis for investment in power has indeed changed. Now the Electricity Act, 2003 calls for sound market design, transparency and competitive tariffs. It mandates "optimum scheduling and despatch" in supply, and "open access," so that efficient power producers can competitively seek custom.
Yet, the fact remains that the Act was notified only recently, on June 15 last year. Anyway, the various provisions of the Act, which call for "competition, efficiency, economical use of the resources, good performance and optimum investments" currently have firm legal basis.
Concurrently, competitive tariff bidding implies much scope for attractive returns on the basis of efficiency improvement and cost economies. Note that with power tariffs decided on the basis of competitive bids and meritorder despatch followed in the grid, there is no formal cap on return on equity.
As the tariff notification of the ministry of power of January, 2006 says, "return should attract investments at par with, if not in preference to, other sectors so that the electricity sector is able to create adequate capacity."
So by aiming for economies of scale, read large generation capacity, setting up thermal plants at coal pit head and competitively sourcing equipment, it ought to be possible to garner handsome returns, of perhaps 25% or more. Note also that with the pan-India demand for power expected to grow at a steady clip, the very real possibility of sustained returns would more likely than not rev up valuations.
Also, with super-critical boilers (more efficient combustion systems) required to be procured for the upcoming ultra mega power plantseach of 4,000 MW capacityit should mean further productivity improvement in generation.
And a disproportionate share of such projects in one's portfolio, would surely mean added scope for higher investor returns.
There remain real credit risks in power generation , no doubt, and serious concerns of non-payment by state utilities. But supplying to multiple utilities and large consumers may significantly reduce such risks and make them far more manageable. Meanwhile, the CERC's tariff order of January 7, 2008, capping tariffs at Rs 4.06 per unit for infirm power read shortterm sales from certain producers, seems more likely to short-circuit supply.
For those with returns liked to capital costs, such as NTPC, the extra offtake is to have mandatory ceiling tariffs. Since similar sales by producers with tariffs not linked to capital costs does not quite invite rigorous caps, the norms do seem unwarranted. The order does underline the fact that there is "a severe shortage of power."
Additionally, sec 66 of the EA, 2003 is clear-cut on the need for a proper "market (including trading) in power." With merit-order despatch now the law of the land, what's surely required is uniform norms across the board in power.
Source : economictimes.indiatimes.com |
|
posted by Unknown @ 1:57 AM  |
|
|
|
|
|
