R-Power has spent half of IPO money

"Interestingly, the bulk ofReliance Power Ltd (R-Power) has spent at least half of the Rs11,200 crore it raised through an initial public offering (IPO) in 2008, but is yet to make substantial progress on the power projects mentioned in the draft red herring prospectus filed before the public issue, according to a Monday report from brokerage Macquarie Equities Research Ltd.R-Power, the power generation company of the Reliance- Anil Dhirubhai Ambani Group (R-Adag) had, at the time, the largest ever IPO.

"It is interesting to note that half of IPO proceeds have been spent, and yet we are still some way from execution of R-Power's major power projects," Jeff Evans, an analyst at Macquarie, said in the 2 August note.

A person familiar with the matter said during the IPO, six projects had been identified totalling nearly 10,000MW. In all of these projects, the money that needed to be infused by way of equity has been pumped in and the rest of the capex has to be funded through debt, except Sasan (Madhya Pradesh), where some more equity has to be infused at a later stage.

Only the projects at Shahapur (Maharashtra) and Urthing Sobla (Uttarakhand) have not made progress as expected due to regulatory issues, he said on condition of anonymity.

The remaining projects at Krishnapatnam (Andhra Pradesh) and Chitrangi (Madhya Pradesh) and three hydropower projects were at the business development stage during the IPO, so they were classified in the general corporate purposes category, the person said. In the last six months, since Krishnapatnam and Chitrangi have made good progress, around Rs1,500 crore has been invested there.

Out of the Rs11,200 crore raised by the IPO, Rs8,642 crore was allocated to the six identified projects and the remaining transferred for general corporate purposes and share issue expenses, he said.

According to the Macquarie report, R-Power had already used 52% of the IPO proceeds, or about Rs5,300 crore, at the end of the June quarter.

 "Interestingly the utilization in the past two quarters hasn't been with the projects highlighted in the prospectus," the report pointed out.

While the capital expenditure incurred in the quarter ended June 2009 was on developing power projects mentioned in the prospectus, the last two quarters saw the bulk of the capex going into projects in Krishnapatnam, Chitrangi and some hydropower projects, which were all announced after the IPO.

"Though some of the promoters' equity required for the additional capex required can come from profit on investments and operating income that it has started generating from the last quarter, where the rest of the money would come from remains to be seen," said S.P. Tulsian, an independent stock market analyst.

Macquarie cited risks to growth prospects and coal assets underpinning R-Power's value, saying it may face hurdles securing natural gas supplies and developing its 2 billion tonnes of coal reserves given its lack of experience in mining."We can't justify the current market value of the stock considering the ongoing risk around execution," the report said, retaining its underperform rating for R-Power.