Analysis of Essar Energy’s Objectives and Structure
Essar Energy Plc is an Indian energy producing company that has been in operation for nearly twelve years and is also the second largest power producing private company in the country (Espinasse 218). This company has projects and operations in gas, oil and power and aims to be the world’s largest oil refiner. To achieve this, Essar Energy aspires to raise nearly three billion dollars in the London Stock Exchange by going public (Kirk 34). This paper explains the key operating characteristics of Essar energy plc in comparison with Drax Group plc and investigates whether Essar’s initial public offer was offered at a fair price.
Key Operating Characteristics of Essar Energy Plc
Essar energy is an entity within the Essar Group of Companies, and it comprises of three operating segments; refinery and marketing, exploration and production, and power (Espinasse 218). The refinery and marketing segment runs a petroleum refinery and a number of retailing stations all over India (Bose 118). This sector mainly refines crude oil and trades in finished oil products and by products. The exploration and production segment, on the other hand, carries out exploration and production of oil and gas in Australia, India and West Africa. The power segment runs a number of electricity generating plants in India and Canada, inclusive of gas and liquid based fuel stations.
Essar’s IPO Was Not Offered at a Fair Price
To understand whether the issue was made at a fair price we shall compare Essar Energy plc with Drax Group plc (see table 1-4 and appendix 6). Essar Energy’s IPO price of 450-550 pence is relatively high compared to Drax groups’ 275 pence released in 2005. Constant pressure was placed upon Essar to reduce their prices, which eventually they revalued to 420 p. From the calculations and tables in the appendices, the PE multiples for Essar and Drax are 400p and 76.82 respectively indicating Essar had a higher valuation compared to Drax Group. The price to book multiples for Essar and Drax were 62.04 and 145.94 respectively, their price to sales multiples were 4.48 and 2.396 respectively and their PEG multiples were 29.54 and 21.95 respectively.
Drax Group’s rates are competitive as can be seen even in their growth rates represented in the grow chart seems to be increasing at a steady rate as compared to Essar which is on the downward trend. These fair rates could have been the reason for their high operating income of 500 as compared to Essar’s 496. To be competitive enough as Drax Group, Essar Energy could have set their IPO prices at an investor friendly rate of 420 p as the market demanded.
Reason for choosing Drax
In relation to the UK equity spreads, Drax and Essar have 0.004% and 0.001% shares in the UK market share respectively. Their involvement in the UK market is quite significant and the difference in market share is varied. Their performance in the market share index is not the same even though their nature of operation is similar. This puts the two companies at a better position when one wants to study about the stock market in the UK as carrying out comparisons on such two companies is easier. This is what propagated the choice of Drax company in our study. Drax had a progressive increase in the price of their shares. The prices of their shares were not as stable as the one for Essar. We wanted to compare the effect that such type of instability can have to the performance of a given product or stock in the market. From our studies and comparisons, we realized that the instability in the share value for Drax Company resulted into a significant decline in the number of investors in the company. This can be seen from the following charts which shows the performance of Drax for the last five years and the Group forecasts
Table for Drax Company
Source: http://www.digitallook.com/companyresearch/149583/Drax_Group/company_research.html
From the table above the revenue for the years 2011 and 2012 are likely to be lower basing our prediction on the current trend of the market. However, the trend is more likely to catch up once the management carries out some drastic measures to control the product prices and ensure the stability in the price of the products.
Morgan’s and Deutsche Bank Pricing for IPO
According to Saika, Morgan and deutsche bank, pricing of Essar at an initial price of 450-550 pence per share was not fair but a bit pricey. Using their method of valuation by future cash flow to firms’ method, deutshe bank and morgan valued the initial IPO at 570 p. There was constant pressure on them to revalue the price and make it cheaper (Mile and Leahy 23). Despite the pressure, this issue saw Essar raise more than $1.95bn, which Johnson and Leahy said made them to be valued at $9.5bn and $11 bn (Steve 5). This initial price was baulked at by fund managers and investors as it was feared it may lead to the collapse of the listing unless a rethinking was done (Evans 45).
Market Capitalization
The Drax Company is currently having a gross debt of £370m based on the share price of 485p. The company has a market capitalization of about £1.65bn based on the same share price. Essar energy on the other hand has a market capitalization of £5,533.64 million. This makes it the 52nd most valuable company in the stock market. This figure also places the company in the middle of the 102 listed companies.
Share prices
The IPO for Essar was 420p while during the time Essar was being listed; the price for the Drax shares was 483.10p. The price of the Drax shares has always maintained a constant price trading at between 450p– 490p in the last few years.
Works Cited
Bose, Rupa. India Business Checklists: An Essential Guide for Companies. Singapore: John Wiley & Sons. 2009. Print.
Essar, Morgan. Prospectus. 30 Apr. 2010. Print.
Espinasse, Philippe. IPO: A Global Guide. Hong Kong: Hong Kong University Press, 2011. Print.
Evans, Simon. “Investors Wary of IPO for India’s Essar.” The Independent 20 Apr. 2010. 6-7. Print.
Kirk, Robert. IFRS: A quick reference guide. Burlington, MA: CIMA Publishing, 2009. Print.
Mason, Rowena. “Essar FD Resigns Two Months After Float.” The Telegraph 20 Aug. 2010: 20. Print.
Mile, Johnson and Joe Leahy. “Essar Energy Sets IPO Price Range”. Financial Times. 23 Apr. 2010: 23. Print.
Pan, Hui. “On Mobile plans IPO of $121.95 million” India Weekly Telecom Newsletter. 4.26 (2009): 23. Print.
Saika, Siddhartha. “Essar Launches London IPO.” Financial Chronicles 22 Apr. 2010: 30. Print.
Steve, Gerald. “Essar Energy Targets $2.5bn From Record Listing.” Euro week 22 Apr. 2009: 1-7. Print.
Ruai, Prashant. “Essar Group May List More Businesses In London.” Economic times 25 Apr. 2010. 5. Print.
http://www.draxpower.com/investor/shareholder_info/dividend_history/
