Should you invest in Reliance Power at Rs 400 plus per share? Do the prospects support this price? A comparison with NTPC on the basis of market capitalisation would suggest that Reliance Power share does not deserve Rs 400 plus. Verdicts differ.
THE MUCH awaited Reliance Power IPO, the first from the Anil Ambani stable (ADAG), is likely to set the mood for the primary market in 2008. The IPO is scheduled to remain open for subscription between January 15 and January 18. It carries a price band of Rs 405-450 (26 crore equity shares, with a face value of Rs 10 each). Analysts and equity market experts believe that the issue is not for short-term investors who are extremely vulnerable to the downside risk.
Those fortunate enough to get the IPO allotment hope to make some quick bucks upon listing. They can sit back and relax since most analysts believe that Reliance Power stocks may get listed at Rs 900, if the grey premium is any indicator. However, there is a twist to the tale that follows thereafter. "At Rs 900, Reliance Power will command a market cap of Rs 2 lakh crores, similar to that of NTPC that has an installed generation capacity of 27,000 MW. Reliance Power has zero installed capacity at present, which is expected to reach 6,000 MW by 2011 and further, 26,000 MW by 2016," an analyst said.
The 600 MW Rosa Phase-I plant is the only one that will have witnessed construction at the time of listing; the company doesn't even hold the required land for some of the projects. The first project that is expected to generate some meaningful earnings for the company is scheduled to go on stream in December 2009.
The total project cost has been estimated at $22.1 billion and 80 per cent of it is expected to be funded through debt. "The IPO proceeds at the upper band of Rs 450 will be sufficient to execute just 7,000 MW of capacity by 2012, which implies that further equity dilution can be expected in future. The hype suggests that people are willing to put in money based on the group's reputation without paying much heed to the underlying fundamentals" another analyst said.
Further, an investor needs to read the following company statements (preliminary prospectus) carefully before taking the investment decision: "The completion targets for our (Reliance Power) projects are estimates and are subject to risks, including, among other things, contractor performance shortfalls, unforeseen engineering problems, force majeure events, unanticipated cost increases or changes in scope and delays in obtaining certain property rights, fuel supply and government approvals, any of which could give rise to delays, cost overruns or the termination of a project's development."
There is no doubt that power sector is India's hottest story right now and most of the power stocks have performed exceptionally well on the Indian bourses in the recent past. The National Electricity Plan estimates that power demand will grow at an average annual rate of 9 per cent between 2007 and 2012 and at 7 per cent over 2012-2017. However, some analysts believe that India's power sector seems to be heading towards the path once traversed by the IT sector at the beginning of this millennium. The euphoria surrounding the ensuing Reliance Power IPO has all the ingredients to prove that we have learnt nothing from history. And "those who forget history are doomed to repeat it."
