Essar Energy sets terms for London listing

Essar Energy, a private sector Indian company with interests in the power and oil and gas sectors, yesterday started bookbuilding for what looks set to be the largest Indian initial public offering in London ever. It will also be the second largest listing by an Indian firm in any market, behind Reliance Power's $2.9 billion IPO in January 2008.

Essar, which is incorporated in the UK, had already announced that it plans to raise up to $2.5 billion by selling 20% to 25% of the company to institutional investors, but yesterday it specified that it will offer the shares at a price between £4.50 and £5.50 apiece.

It hasn't fixed the number of shares on offer, but rather it is the deal size that is fixed. The number of shares to be sold will depend on the final price, which is also why the company has retained the flexibility with regard to the size of the free-float.

The price range values the company at between 2.3 and 2.9 times its estimated pre-money book value for 2011, or at a price-to-earnings multiple between 11.1 and 13.6 on a post-money basis for the same year.  

The key reasons for investing in this company have little to do with its valuations based on current assets or earnings, however, but with its growth potential -- especially within the power segment where it is in the process of multiplying its generating capacity to 11,470 megawatts by 2014 from 1,220MW at present. Given the scale of the expansion, a belief in the management's ability to execute on time and within budget will be highly important for deciding whether to invest or not.

India currently has one of the lowest per capita consumption rates of power and oil and gas among the emerging market economies, which together with the fact that it is already the second fastest growing economy in the world after China is expected to lead to high growth in the demand for energy. And India is already struggling to fill this demand for power. Based on data from AT Kearney, the country had a power deficit of 11% in 2009 and the World Bank estimates that 44% of Indian households do not currently have access to electricity.

In addition, Essar Energy also owns a 39% stake in Essar Oil, through which it conducts oil and gas exploration and production as well as refining operations. Essar Oil is listed both on the Mumbai Stock Exchange and the National Stock Exchange of India, but has a free-float of just 11.4%, which means it hasn't been a realistic investment option for most foreign institutional investors. The possibility to get exposure to Essar Oil through a London-listed vehicle should therefore add to the attraction of Essar Energy.

The order books will remain open until April 29 and the pricing is expected the following day. It is expected to start trading in the first week of May. Deutsche Bank and J.P. Morgan Cazenove are joint bookrunners.

For further details about the company and the rationale for listing in London, please see our earlier story -- Essar Energy readies largest Indian listing in London -- which was published on April 14.