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DISCLAIMER: This mail is INFORMATIONAL in nature. Please use your own analysis for decision making
INVEST IN RELIANCE POWER IPO FOR LISTING GAINS ONLY
Bull markets defies logic.Classic example is now in Reliance Power
IPO.Lets Analyse.**
Just for a moment think two companies in the power generation sector
that Reliance Power can be compared with:
*NTPC and Tata Power.*
*NTPC* has current capacity of 28000 MW and has target to achieve
66000 MW by 2017.
*Tata Power* has current capacity of 2300 MW. It will be adding 10000
MW of capacity more by 2012. Thus, it will have a capacity of around
12300 MW by 2012 end.
If everything goes as planned, capacity of Reliance Power at end of
each year till 2016 will be:
2008: 0 MW.
2009: 0 MW.
2010: 1500 MW.
2011: 5500 MW.
2012: 5500 MW.
2013: 16980 MW.
2014: 22040 MW.
2015: 23040 MW.
2016: 28200 MW.
Around 2012 - 2013, both Tata Power is expected to have similar
capacity as Reliance Power.
The interesting thing is at current price of Rs 1457, Tata Power is
valued at just Rs 30000 crore. Remove Rs 10000 crore of investments
and you can have it only for Rs 20000 crore.
At Rs 450, Reliance Power will have market cap of 100,000 crores.
Roughly 3.34 times that of Tata Power.If it lists at 900 then the
market cap would be 200,000 crores
With 2300 MW capacity, Tata Power made standalone profit of Rs 700
crore in FY 2007. With 28000 MW capacity, NTPC made standalone profit
of Rs 6900 crore in FY 2007.
Lets assume Reliance Power turns out to be much more efficient than
these two companies. Add to that increased power rates.
With 28200 capacity, assume Reliance Power makes Rs 15000 crore of net
profit in 2016-2017. Power companies are considered as utilities and
worldwide trade at 10-15 times their earnings.
Lets assume 15 times ratio for Reliance Power in 2016.
What will be its market value?
15000 X 15 = Rs 225,000 crore or Rs 995 per share.
*This is an optimistic view:
-there will be no further equity dilution till 2016.
-assuming nearly twice as much efficiency as NTPC.
-that all projects will be completed before 2016 end.
-the company would have paid back all debt by then and interest costs
would be in similar range as NTPC.
(NTPC already has established 28000 MW capacity and comparatively much
lesser interest costs.NTPC's P&L account states Rs 1800 interest cost
for FY 2007).
So what about the debt?
The RHP mentions estimated cost of six projects as Rs 30000 crore+.
Analysts estimate that Reliance Power will need another Rs 70000 crore
of debt to finance its projects which are estimated to cost 100000
crore+.
*Rs 70000 crore of debt* is not going to come at 2% interest rate.
Even a 6% interest would mean *an annual interest cost of Rs 4200
crore*. Only in 2013, the company's capacity will cross 10000 MW.
Thus, I do not expect any major debt repayment before 2014. If things
don't go as planned, the debt burden will make a mockery of the
balance sheet.
With Rs 12000 crore raised in equity and Rs 70000 crore of debt, these
whole business will become a high-risk venture.Any unforeseen delay/
derailment of plans may create major problems for this company.
*Reliance Power - The Overlooked Fact:
*Is Reliance Power just "Reliance Power"?
No.
It is actually "Reliance Power Limited" - a limited company.
So what does this mean for Reliance Power Limited?
It means if in the rare case, the calculations of the management go
wrong and the company somehow goes to insolvency, none of the
shareholders will lose anything expect the value of the shares.
If you are a share holder of Reliance Power and it goes into
insolvency (unable to pay back debts), what do you stand to lose?
Rs 430 per share.
Lot of money....right?
*What does Anil Ambani's AAA Project or REL lose?*
Both of them had got their 45% (post-IPO) stake for Rs 1000 crore
each. Plus they will each subscribe to 1.6 crore shares each at Rs 450
in the IPO......which works out to be Rs 720 crore.
Thus, AAA Project will be getting 101.6 crore shares of Reliance Power
for Rs 1720 crore and REL will be getting 101.6 crore shares of
Reliance Power for Rs 1720 crore.
*Little less than Rs 17 per share.
*This is what both the promoters are risking in this project....*Rs 17
per share*; while investors will be risking *Rs 450 per share*.
*This is exactly the reason why Reliance Power was created.
First, by contributing just Rs 1720 crore each to Reliance Power, the
promoters have shifted all risk to investors.
Second, by getting 45% stake (in REL's projects) to AAA Project for a
mere Rs 1000 crore, AAA Projects (and Anil Ambani) have created wealth
out of thin air.
Anil Ambani's Rs 1000 crore investment will be worth Rs 100000 crore
when Reliance Power lists at Rs 900.
If the gamble works, the promoters (holding 90% stake in Reliance
Power) will be worth billions of dollars.
If the gamble doesn't work, the promoters will lose Rs 1720 crore each
and investors will lose Rs 10000+ crore which they will be paying for
a mere 10% stake in Reliance Power.
*What a way to create wealth...!!!....I don't have words to describe
the brilliance of Anil Ambani's plans....
========================================
So what will I do with this IPO?
Firstly, I will subscribe to it,not because I think it is a good
company or is offering great value at Rs 430, but because I am in this
market to make money.
The markets are in such a frenzy, nobody bothers about valuations
anymore........not even QIB and other institutional investors.
Everyone knows that Reliance Power will list at a premium and thus
everyone will apply....valuations can wait for some other day.....
*What will I do post-listing?*
For bigger IPO's like Power Grid and Mundra Port, I have followed a
*sell-half-keep-half strategy.*
Assuming listing at Rs 900, for Reliance Power, I will follow *sell-
all-keep-none strategy.*
*First, other companies are much cheaper.**
*Why should I keep a company valued at *Rs 200000 crore* -
when another company (with similar capacity by 2013) is available at
*Rs 30000 crore* with* much smaller debt burden* and *Rs 10000 crore
worth of investments*.referring to Tata Power.
If Reliance Power (at Rs 900) is available for Rs 200000 crore, *why
not buy NTPC for a similar price*......Rs 225000 crore. NTPC plans to
have a capacity of 66000 MW in 2017, while Reliance Power will have
28200 MW capacity in 2016.
*Second, the risk is higher than other existing companies.*
With marginally cash flows for next 5 years and Rs 70000+ crore of
debt, the *risk for Reliance Power is high*. *Tata Power and NTPC have
existing cash flows to handle expansions....Reliance Power does not.*
*
Third and the biggest factor is....the valuation of the company
doesn't make much sense.*
Why should Reliance Power be valued at Rs 200,000 crore, when in
*highly optimistic scenario, it will not make more than Rs 15000 crore
of profit in 2016*? Even if it touches that figure of Rs 15000 crore,
its market value in 2016 will not be much more than 225,000-300,000
crore. (if given a 15-20 times multiple).
*A fixed deposit will make more money than that in 8 years.....and
that too without any risk.
Also, I got the optimistic Rs 15000 crore figure by assuming two times
margins as NTPC. The fact is..... at least till 2014, Reliance Power
will still be carrying most of its Rs 70000 crore debt and its
interest costs will squeeze margins to a large extent. *
Final verdict: Apply with your own level of risk.
I will be selling all shares at 9:55..........not even waiting for a
better price. If you want to try for a better price, hold at your own
risk.
The level of insanity in the markets is at a high...
*Value* and *risk* mean nothing today.....*price* and *profit* are the
keywords.
Don't invest in reliance power IPO - following are key reasons:
1) Anil doesn't know where is he going to start power plants. So no one knows when power production will start
2) When he will finalize site, it won't be easy for him to get land. As usual lot of agitations will happen
3) Biggest problem is - HE DOESN'T HAVE ANY ARRANGEMENT FOR GAS - Mukesh has already said no to him for gas
4) He is supporter of people like Mulayam and Amitab - hence Neither Congress Nor BJP will support him for his power plants
5) States like UP, WB will not give him land
6) His plan to take over power plants like dabhol are already discarded by Congress Government
In this conditions of uncertanities, there is no way he would be able to earn profit from the investores money - atleast
Zerodha (Trading & Demat Account)
RHP
