Saif Power offering

With Saif Power’s offer for sale, September 2014 would end with two offerings, and that too in the much needed power sector. Scheduled for September 30, 2013, the offer of Saif Power Limited (SPL) will consist of 48.3 million ordinary shares, which is equivalent to 12.5 percent of the total paid up capital of the firm.
The book building portion of the offer comprises of 75 percent of the total—36.231 million ordinary shares with a price band of RS18 per share to Rs30 per share-–to HNWI and institutions. The remaining 25 percent of the offer will go to the general public where the strike price will be determined through the Dutch Auction Method.
SPL was incorporated as a public limited company in 2004. The independent power producer operates a 225MW thermal power project in Sahiwal, Punjab. The dual fuel plant runs on gas and high speed diesel. However, it is mostly run on gas and operates on HSD only when the gas is not available.
Looking at the earnings multiples, the offering is at a significant discount at Rs18, the lower limit of the price band, and so a strike price in the band of Rs23-24 will be well-received. Anything above this range will mean a premium to market multiples, which technically means that the market is expecting big things over the next few months or years. And this is where the company’s fundamentals come into play.
On the positive side, the firm enjoys a rate of return of 18.5 percent in dollar terms on its 30-year Power Purchase Agreement (PPA) with NTDC. The contract also gurantees capacity payments by NTDC to cover financing and fixed operating costs based on a certain dependable power generation capacity irrespective of the dispatch to grid. Also, SPL’s financial performance has picked up in four years with reasonable improvement in net margin.
On the flip side, the plant’s capacity utilisation has remained 51 percent from the date of commencement till Decmenber 31, 2013. Though the offer for sale document claims that its fuel efficiency is one of the highest in country, the sector faces underutilisation of capacity due to shortage of fuel amid sky rocketing demand-–not a good omen for the power sector.
Moreover, the single most significant risk, which should not be under-estimated, is the gas supply to the IPP running mostly on natural gas. With the winter season approaching in no time and no noteworthy gas load management plan or any investment plan, a respite in the gas shortage cannot be seen in the imminent future.
And lastly, even though the IPP might have low dependence on HSD or furnace oil, the high volatility in the gas supply has the power to force the plant to move to expensive fuel, and thus be adversely impacted by yet another devil in the power sector: the circular debt.

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Saif Power Limited IPO

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                                      HUBC   KAPCO     NPL    NCPL     LPL    PKGP           SPL

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Capacity (MW)                         1292    1638     200     200     362     365           225

Market Price(Rs) (August 23, 2014)   67.82   64.98   37.53   43.99   16.73   17.84   18.00   30.00   23.00

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                                    Jun-14  Jun-14  Jun-14  Jun-13  Dec-13   Dec-13         Dec-13

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EPS (Rs/share)                        5.66    8.78    8.24    7.45    1.70    2.98    3.15    3.15    3.15

Price Earning ratio (P/E)            11.98    7.40    4.56    5.90    9.84    5.99    5.71    9.52    7.30

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Power Sector P/E (Average)                                         7.34

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SPL Offer Price Discount @Rs18 (floor)                           22.16%

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SPL Offer Price Premium @Rs30 (cap)                              29.74%

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