By Research Desk
about 14 years ago


Reliance Power is entering the capital market on 15th January, 2008, with a public issue of 26 crore equity shares of Rs.10 each, in the band of Rs.405 to Rs.450 per share. Of this, 3.20 crore shares would be subscribed by the promoters, while net issue is of 22.80 crore equity shares.


If one wants to meticulously analyze this company, it would probably run over hundred pages, and none of our readers may have that much time and interest to read it!


The company has plans to develop 13 medium and large sized power projects with a combined planned installed capacity of 28,200 MW, with an estimated outlay of close to Rs.1,30,000 crores. However, right now, the company has crystallized plans for 6 projects, with a capacity of 7,060 MW with total outlay of Rs.31,789 crores, which is being financed with debt of Rs.22,836 crores and balance of Rs.8,953 by equity. The proposed issue, at the upper band of Rs.450 per share, would mobilize Rs.11,700 crores, of which, promoters are bringing in only Rs.1,440 crores. About 88.50% of expanded equity base has been acquired by the promoters at par.


Of these 6 projects, Rosa Phase I, a 600 MW Coal Fired Project would start in March 2010, while remaining projects would go on stream with Rosa Phase II (600 MW) in September, 2010, Butibori (300 MW) in June 2010, Shahpur (4,000 MW) in two phases in March 2011 and December 2011, Urthing Sobla (400 MW) in March 2014 and Sasan (3,960 MW) in April 2016. So, it is certain that there would not be any financial performance from the company till FY10. Then, as an investor, what does one do, as no results or financial performance would be available to analyze neither quarterly nor yearly? Maybe, track and play on the stock price, as that is the only adventure that would remain during this interim period of project execution and erection.


The expanded equity of the company, Post IPO, would be placed at Rs.2,260 crores and taking the issue price at Rs.450 per share, this translates into a market capitalization of Rs.1,02,000 crores considering grey market premium of Rs.370 per share, with expected listing price of Rs.820, the same would be at Rs.1,85,000 crores. Enterprise value, in this case, would be close to Rs.2,10,000 crores. Does, the company, with long gestation periods, for all the greenfield power projects, deserve this kind of valuation ?


NTPC having a power generating capacity in excess of 25,000 MW, has a market capitalization of Rs.2,27,000 crores with estimated enterprise value (EV) of Rs.2,45,000 crores. NTPC also has an expected EPS of close to Rs.10 for FY 08 with Govt. of India holding 90%. Tata Power having power generating capacity of close to Rs.3,000 MW has a market capitalization of Rs.34,000 crores, with EV of close to Rs.36,000 crores. Even Tata Power has project pipeline of close to 7,000 MW, including Ultra Mega Power Project of 4,000 MW at Mundara.


While comparing these companies with Reliance Power, you are forced to conclude that either these companies are undervalued or Reliance Power has irrational exuberance.


Alternatively, Reliance Energy Ltd., one of the promoters of Reliance Power, which would be holding about 45% stake, post IPO has a present market capitalization of Rs.60,000 crores with EV of about Rs.65,000 crores. Its EPC, Contracting and Realty business is being valued at about Rs.20,000 crores, leaving valuation of Rs.45,000 crores, for 45% stake of Reliance Power. So, is it not advisable to buy Reliance Energy at Rs.2,565 instead of buying Reliance Power at Rs.450, with an eventual cost of about Rs.700 (considering interest cost of IPO) per share?


The restructuring of various power projects from Reliance Energy into the company were questioned, but concern is more on diluting the stake of Reliance Energy to 45%, post IPO. The new projects of close to 21,000 MW would need an investment of about Rs.95,000 crores, which would leverage the balance sheet, coupled with equity dilution, as there won't be any internal accruals for the next 2 - 3 years from the operations. Also, some of the projects, like Sasan have been acquired at a wafer thin margin, (for the sake of acquiring it), which we wish, should not become onerous for the company. We have no apprehensions on the capability of the group, but there remains great execution risks, due to long delivery schedule of critical equipments like turbines, boilers and other power generating equipments.


Strictly speaking, comparing purely on fundamentals, better plays are available in the secondary market. Why to wait for 2 - 3 years, for the company to show performance? Still, with these if's and but's, HNI category is likely to get subscribed by close to 200 times, QIB, maybe, by about 150 times and Retail Category by about 7 to 8 times. So, if you want to ride the momentum, go ahead.





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