Disclaimer: this is not a recommendation by my thoughts on the name. Kindly do your own due diligence. I might have a vested interest in whatever I say?
This is what I wrote some 2-3 months back on the name
âThis name would be generating operating cash flows (next year) of more than the market cap of the company. Currently the company is quoting at 0.8 times Market cap / operating cash flows (FY2014)â?? Current market cap of the company is 2600 crore and as per management it would be generating an operating cash of 3300 crore next year We all know that the power sector is going through a really rough rough patch. Policy paralysis, Coal scam and what not The IPPs have become new untouchables in the market with no one willing to even take a look at them. As I understand that there are multiple issues ranging from coal supply agreements to power purchase agreement to execution risks etc. The broad based brushing of the sector has led to even the reasonable projects quoting at a massive discount to their real worth. One such company isIndiabullspower It has four projects under development Unit Capacity Date of completion Coal Linkage PPA Levalized Tariff Amravati I 1350 MW Dec 2012 Yes 1320 MW Rs. 3.26 unit Amravati II 1350 MW Far away Yes LOA No NA Nashik I 1350 MW Feb 2013 Yes 950+300 MW Rs. 3.42 unit Nashik II 1350 MW Far away Yes LOA No NA Total 5400 MW Do take a look at project pictures http://www.indiabulls.com/power/pdf/press_june_2012.htm http://www.indiabulls.com/power/amravati_project_gallery.htm http://www.indiabulls.com/power/nasik_project_gallery.htm timing is perfect the projects are so close to completion and market is busy with vivid coal scam news I would be talking about the only 2700 MW out of total 5400 MW as it is nearing implementation. There are very few private IPPs which have thiscombination of domestic coal linkage (with coalIndia) and power purchase agreements in place. +coal scam is mostly irrelevant to it except the same may cause some operational delays in terms of coal supply. I am sure that you know that the domestic coal is a lot cheaper and therefore entails a lot less risk of becoming unviable as more and more new capacity comes in. In addition, the PPA tariff of Rs. 3.26 and Rs. 3.42 are very reasonable which would entail it a preferred supplier status for with SEB. Therefore if the SEB has to cut on procurement it would cut the expensive sources of power rather thanIndiabulls. + the agreement is with Maharashtra which in one of the healthy SEBs in the country. Unlike Adani and Mundra UMPP a part of increase in the cost of fuel is pass through. IT TICKS ALL THE BOXES ? Risk assesment: Risk Example Indiabullsstatus Fuel supply Like many of Adani and Lancoâs projects donât have fuel supply contracts. Indiabullshas LoA from coalIndiaand would soon sign FSA once CoalIndiaboard finalizes the FSA Offtake risk Again many of Lancoâs projects donât have PPA for offtake of the produced power Indiabullâs have offtake agreement for a majority portion of Phase I capacity. Not considering Phase II as it is far far away Pass through risk Some projects of Adani cannot pass the increase in the cost of coal to the buyers As I understand a part of fuel cost is pass through Coalgate risk Tata, Reliance and JSPL etc have been allocated mines and therefore would suffer if the mines are deallocated No risk as it is getting coal from CoalIndia Execution risk Chinese equipment has had teething problems inIndia Using more proven BHELâs equipment yet this is the first power projectIndiabullsis executing and there might be teething problems SEB risk Poor health if customer i.e. SEBs results in increased receivables like in case of Nyvelli Lignite has 2K to 3K crore dues from Tamil Nadu Most of the power would be supplied to Maharashtra which is considered relatively healthy Costs SEBs prefer to offtake with lower cost producers to reduce their deficits Indiabullstariff is reasonable at Rs. 3.26 and 3.42 per unit further the CoalIndiawould givepreferredtreatment to power projects with PPA as opposed to merchant projects As per the management Cash flowsâ Assuming Rs 1/unit margin (difference between sales price and cost of generation), cash generation from average of 25 billion units produced in FY 13â14 would be US$ 600 million by Marchâ2014. Go to page 21 of this presentation http://www.indiabulls.com/pdf/Indiabulls%20Group%20Presentation_Web.pdf Risks: Coal supply could not be as per the optimal levels Project start up hiccups Corporate governance and Veritas report Here is the report http://www.advisor.ca/wp-content/uploads/2012/08/IndiaBulls-August-01-2012.pdf I have been through the report and I find unusual in the report. Basically the report suspects the listed companies dealings with the promoter group companies. The same is quite common amongst Indian companies be it Reliance or be it Wockhardt?? That does not mean that I rate promoters very highly. In fact one needs to apply a higher COE to such companies. All I am saying is thatIndiabullsis not going bust and it is not an obvious case of a scam. Indiabulls's response