31 Oct 09 Irrational Power Frenzy

The last few months have seen some spectacular sums pouring into equity markets via IPOs. Especially power utility stocks. After Adani Power, we had NHPC and most recently, Indiabulls Power. While over-subscription is expected in an irrational bull phase (like when Reliance Power broke all records last year), application monies for these three stocks added up to a whopping Rs 230,000 crores ($ 50 billion)! All of them were more than 20 times oversubscribed!

There is no doubt that India’s power sector is in dire need of funds. Equally, power generators are assured of adequate demand for many years to come, given the acute shortfall of power capacity.

But does this at all justify the frenzy for power IPOs? Especially when the returns are several years down the line? While NHPC does have substantial existing capacity, the others are practically start-ups… in the sense that profits of any kind are some years away. New capacity funded by the IPOs will come on stream only in 2013/2014, and that is assuming there are no delays. And this is in today’s India, where large projects invariably over-run on costs and time.

Why on earth would anyone invest in a company that will not provide returns for the next 4 years?

And especially, why supposedly savvy fund managers? The industry (read mutual funds, investment bankers and their kin) likes to tell us that retail investors are dumb, so they must invest via a fund manager. But the only sensible group I can see here are the retail investors!

In Adani Power, retail over-subscription was 3x, compared to an 40x in the institutional category. Indiabulls Power saw a similar craze from fund managers, while the retail portion was filled with great difficulty. Listing returns on all these three stocks (and last year’s Reliance Power) were non-existent, so this stupidity is even harder to understand.

One commentator on TV recently likened this to a bubble, and much worse than the dotcom craze! I’m not sure whether we’re at that level of craziness, but we’re sure getting there. You can bet that the huge sums being raised by power and infrastructure companies (including hopefuls) will attract many other ambitious entrepreneurs. So the bubble is still growing!

And like in every such bubble, at the end, investors will be left holding (almost) worthless paper.