Two Power Stocks to watch out for and that may Lighten up for a Brighter Diwali this year…Both also begin F & O Trading from Today

Adani Power at Rs 128…..Private Sector Power Player…..IPO was a year ago at Rs 100 in July/August 2009…so we see a 28% gain already…Permitted Lot in F & O is 2000 shares and the August 2010 Call Option for Strike Price of Rs 130 is quoted @ Rs 3

NHPC at Rs 32…..PSU….IPO was a year ago at Rs 36 in August 2009…..so we see a drop of over 10%….Permitted Lot Size in F & O is 8000 shares and the August 2010 Call Option for Strike Price of Rs 32.50 is being quoted below Rs 1…so one can take a 8000 shares position for Rs 260000 for a Premium of Rs 8000…..by end August if NHPC climbs past Rs 33.50 you start making a Profit…or else you stand to lose just Rs 8000…..If you buy 8000 shares of NHPC in the Spot you would have to pay @ Rs 260000….Instead for one month you get a similar leverage by paying just Rs 8000 !….and Government is planning a Mega IPO for PSU Giant Coal India around Diwali this year…..will not look good if another listed last year PSU like NHPC is below it’s IPO Price of Rs 36!

Think about it….Cheers !   

Should we give up on Reliance Power at Rs 177 and therefore even RNRL at Rs 45 ?

Heart is soft and tells me to be hopeful and have faith and be patient…and hold

Head is hard and tells me that the markets are being too kind to both…rationally and logically you should sell…markets are irrational here…so sell

They tell us not to get Emotional where Investments and Stock Markets are concerned…..But do Emotions come from the Heart or from the Mind ! ?

Anil Ambani has been facing the ire of Reliance Power allotee shareholders for over two years now…..The shares were allotted in the IPO at Rs 427.50…a 5% Discount for Retail Investors at the finalised IPO Price of Rs 450….Listing was hyped up to be at over Rs 700…QIBs Portion was oversubscribed 100 times and they got just a 1% allocation…..this was clearly an orchestrated application game….Why?…these QIBs were ready to pounce on Reliance Power at Rs 450…but on listing they simply shied away from the Scrip,not buying at even Rs 350 to Rs 375 levels !

So to appease allotees,Reliance Power declared a Bonus of 3: 5 just after the IPO in January/February 2008…this brought down the Holding cost to just over Rs 267….Reliance Power is currently quoted at Rs 175-Rs 180 range…it has had a 52 Week low of Rs 130….after the recent announcement of the RNRL Merger with Reliance Power in a 4: 1 ratio,big players have strongly suggested to Sell Reliance Power….one has a target of Rs 119 and another has Rs 128…..so will Reliance Power go even lower than it’s 52 week low of Rs 130 ?

I was trying to find some justification for being contrarion here….but Fundamental Insight gives me a sense that Reliance Power will fall from Rs 177 to lower levels…probably even it’s 52 Week Low of Rs 130…before it climbs back again

Direct Comparison with NTPC strengthens this conviction and sense…..judge for yourself from some parameters between the two below

RELIANCE POWER v/s NTPC

Now why would a Rational Investor pay Rs 177 for a FV Share of Rs 10 for Reliance Power when it’s yet 3 years to 5 years from building similar Capacity of 30000 + MW that NTPC has now! ?….when the share Price of a similar FV of Rs 10 of NTPC itself is just Rs 23 away at Rs 200 ?….Is it because  of the Lower Equity of Rs 2396 crs that Reliance Power has because it collected a vulgar premium in January 2008 pricing it’s IPO at Rs 450! ?….and had to give in appeasement a Bonus of 3:5 immediately to bring down holding cost to Rs 267 as pointed out earlier…?

To be fair,Reliance Power is probably the only Company in the whole of the Reliance Groups of both Brothers where Allottee Shareholders are losing value with their holding cost at Rs 267 and current Share Price at Rs 177

Anyway…another angle to look at in considering whether to BUY,yes BUY !,HOLD or SELL Reliance Power is to compare it with risk free returns over 3 years and 5 years…have a look below

So the Question is WILL Reliance Power cross Rs 300 and move towards Rs 500 in a 3 years to 5 years time frame ?…only then would it be worth taking the risk against the opportunity of a risk free 8% CAGR from a Bank Deposit…because only then would one get a CAGR range of 15% to 25% over 3 years to 5 years

This would then depend on Earnings in years 2014 to 2017…this in turn would depend on operating margins then and no delays in implementation…..If NTPC is currently earning @ Rs 8500 crs on MW capacity of over 30000 MW,what would Reliance Power earn on similar Capacity 5 years down the line?….that is the question !….With the Gas dispute behind them,it yet means that Gas,if allocated to them from the KG basin will come only at a price in excess of US $ 4/mmscmd and not the earlier MOU price of US $ 2.34…Immediate Dilution of Equity is Rs 408 crs on merger of RNRL…therefore New Equity will be Rs 2805 crs…assuming Reliance Power,with poorer margins than NTPC,earns Rs 5000 crs on generating over 200 BU earliest in 2015/16,the EPS on new adjusted post merger current equity will be @ Rs 18…at 20 Multiples (similar to NTPC getting now,the Share Price would be @ Rs 360…as this would happen closer to 2015,the above table shows this to give a 15% CAGR over 5 years…..the visible big risks to contend with remain margins,fuel security and delays in implementation

Of course one could switch from Reliance Power at Rs 177 to let’s say NTPC at Rs 200 or even JSW Energy at Rs 125 to remain invested in the same sector…. or even switch sectors….Now if NTPC generates 75000 MW by FY 2016/17,it’s profits would move towards Rs 20000 crs…that’s an EPS of Rs 23 on current equity and a projected share price of Rs 460 on 20 multiples…that’s a CAGR of near 20% in five years….and NTPC has better Fuel Security too…a critical evaluation parameter

As I said, my sense is that Reliance Power is a Long Term Play and it’s Share Price will go down before it goes up !….It’s too early to ascertain what would be the earnings and valuations of Reliance Power’s & RNRL’s  forays into Shipping,Cement and Coal Bed Methane blocks…so why is this merger of RNRL with RePower happening ?…probably to avoid an awkward and embarrasing situation if the Government does not allocate KG Basin Gas for Trading or passing on (RNRL) but will allocate it only to a direct user (RePower)

So if you are an ADAG loyalist,you would not be selling..maybe even buying at lower levels !….otherwise Selling now is a rational option….atleast half your holdings,if not all, in both scrips Reliance Power and RNRL…you would not be irrational if you do so…and not reinvesting the sales proceeds till you get a good or even great Investment Opportunity too would be prudent

To conclude,fall back on a time tested Mantra ‘ When in Doubt,Stay Out or Get Out !’

Reliance Power has nearly 3.6 million shareholders while RNRL boasts of over 2.5 Million Shareholders….you may be one of them…so some food for thought to chew over this weekend

Cheers ! 

Switched on my mobile this morning after a few days of tackling a tough Viral…thank you guys for all your “get well” wishes…they worked

Listened to the live broadcast on stock channels of Mukesh Ambani at the 36th AGM of RIL this morning in Mumbai rolled out the roadmap ahead for his Group…this are a few interesting bytes that really caught my ear

• Now with the rescinding of the Non Compete Agreement with brother,Anil Ambani’s (ADA) Group, Mukesh Ambani’s RIL Group will enter the Power Industry in a very big way…a blueprint is being prepared….what is amusing however is that despite discovering and drilling Gas from the KG Basin,RIL will not execute any gas based project till 2022…so it’s going to be coal based,hydel,nuclear and alternative energies projects….ironically it is supplying this Gas to Other Fertiliser and Power Plants as directed by the Government…even to ADA Group Power Plants when they are ready to accept and if the Government directs then
• Organised Retail has earned Revenues of Rs 4500 crs in 2009/10….in just Five Years it will jump ten fold to Rs 45000 crs !…..keeping in mind that RIL is the first Indian Company to cross Rs 200000 crs turnover this year,this would be a great contributor 

Anything BIG to earn and HIGH growth rates forecast,then rely on RIL to enter that sector….Petrochemicals,Petroleum,Retail,Infrastructure….nowTelecom,Pharma,Healthcare,Power,Education.

What next ?

How about Information Technology …RIL can take a look at the three World Tech Giants,Google,Apple and Microsoft……have a look at this Comparative Table I’ve prepared…RIL against Peers and these three Tech Giants…I’ve used todays ref rate US $ =Rs 46.14 for translating RIL’s Share Price of Rs 1055 and Market Cap of Rs 345135 crs…However RIL Financials are as sourced from RIL’s website (imputed rate used by them is US $ =Rs 44.64)…for the other Global Giants,the figures are sourced from the NYSE/Nasdaq 

KEY COMPARATIVE STATISTICS : RIL v/s Global Peers and Global Tech Giants

Clearly the Tech Giants rule the Exchanges in terms of Valuation and even Market Caps…High Multiples,High Profits and Profit Margins,Low or No Debt,Rising Revenues with new product launches have worked wonders for the three Tech Giants

RIL always thinks BIG…..Organic Growth in Technology Sector will take ages…But with a Market Cap of relatively lower US $ 75 b and the fact that 1/3rd of Capital Employed is through Debt even Inorganic Growth looks difficult for RIL to take over a major World Giant among it’s peers and even the Tech sector if it wants to enter it….what does look interesting is the Infotel playout it has just started with a near US $ 4 b layout…I’ve got their presentation on this and shall be examining it closely sometime soon

So are RIL’s Best Years Ahead as Mukesh Ambani assured shareholders today ?….With strong proven large scale project implementation capabilities RIL surely is excited about the opportunities opening up in India and even overseas…RIL is already a Giant in India in it’s Operations…With It’s Expansion Plans in Petrochemicals,it’s new big scale forays in diversified fields,it hopes to be reckoned as a Global Giant

It’s Best Years may certainly be ahead,but the above table shows it’s got a hell of a lot of catching up to do with Global Giants

Oh ! it’s near BP’s mkt cap only because BP share Price has crashed following the Gulf of Mexico Oil Rig Explosion that is throwing out ,latest upward estimates of 40000 to 60000 barrels of oil into the Sea and is yet to be capped…. seen to be the biggest economic disaster USA is facing….Interestingly President Obama has managed to extract a promise of an initial US $ 20 billion in an escrow account from BP for settling claims and damages for this continuing disaster….if you look at the table,that’s just one year’s sacrifice of PAT for BP….I’m sure there will be more extracted

So should RIL be in your Portfolio ?……and with what weightage?…Simple answer is “Yes”…and the weightage should be atleast 10% of the Equities you hold…..Like Larsen & Toubro and State Bank of India,RIL remains a strong proxy for the India Story…Who Knows ! remember the late 1980s and the BOB Fiscal fiasco when RIL had made a serious and aggressive and hostile bid for Larsen & Toubro only to be thwarted…with Larsen’s market cap under US $ 24 b today,RIL may just relaunch this ambition !…it has never liked losing !….OH ! I just love it when my mind meanders !

Cheers !   

I’ve no bias… but feel sad for Anil Ambani…. I’m with him on this one….. Supreme Court gave a split verdict today in the RIL v/s RNRL Gas Pricing embroglio in favour of RIL

So now 2.34 is out and 4.20 is in !… One perspective is that RIL and the Government have done a 4.20 on this one!

In 2005 when the Reliance Group was split between the Ambani Brothers a MOU was signed between the brothers and blessed by their Mother too… It prescribed that RNRL would be supplied 28 million mmbtu gas  daily by RIL at a price of US $ 2.34/mmbtu….. Anil agreed to the split valuations which included this arrangement too…. He went ahead and got his company RNRL to enter into an agreement with his ambitious baby, Reliance Power, to in turn supply this Gas from RIL for the upcoming 7.4 GW Dadri Power Plant which is slated to be the biggest Gas based Power Plant in Asia

RNRL went to court as RIL refused to honour this MOU citing that Gas was the National Property and they were merely Contractors and the Government owned the Gas and reserved the right to allocate this Gas and also approve the Pricing for this…. The New Pricing Benchmark became US $ 4.20/mmbtu

High Court ruled in favour of RNRL and said that the MOU should be honoured…. RIL went to the Apex Court, the Supreme Court….. Today the three judge bench gave a 2-1 Verdict in favour of RIL and the Government, overruling the High Court Order…. their view is that

• This Gas is a National Resource and the Government is the Owner
• The Production Sharing Contract (PSC) between RIL and the Government supersedes all other agreements, including the MOU between the brothers
• The MOU itself is not a legally binding document, but can be used for inspiration in future negotiations for gas supply between RIL and RNRL… These negotiations must be concluded inside six weeks and the Company law Board should be approached to approve the same

Feel Sad that RNRL and Anil lost out here…. simply because I feel strongly as below

• This issue must be viewed with the mindset of ‘Substance over Form’… just like auditors are trained to do… also it should be viewed,like the Painter Hussain controversy, with a mindset of looking at the ‘intention’ behind creating this controversy
• The MOU was created in 2005 with this Price of US $ 2.34/mmbtu which was the benchmark then as it was a NTPC tender price….. Why was no noise created then ! ?…. Even if the MOU was secret, the price was not!…. Clearly as the Price of Gas began rising, RIL attempted to wriggle out of this committment to supply gas to RNRL at US $ 2.34/mmtu
• It was only in October 2007 that the Empowered Group of Ministers (EGOM) had arrived at a Formula for Gas Pricing
• Mukesh Ambani could easily have honoured this MOU committment… it was blessed by the Mother… and in Mother India, the word of Mother is that of God !.… apparently the boiling intensity of emotions with his brother, Anil Ambani, prompted him to decide not to supply the gas at all….. So RIL chose to default citing that Government was the authority on allocation and pricing of Gas…. clearly government machinery was being misused and the government merely became a front… moot question arises… was the Government playing favourites or truly had the National Interest in mind !?.… the answer will stare at you in the face when you search history and discover that a top RIL executive was arrested because he was caught with confidential government documents…. apparently he was drafting/suggesting/amending a Union Cabinet Meeting Agenda for a Meeting to be held!…. also the current Petroleum Minister and the late Dhirubhai Ambani were great friends from their youth…. read the banned ‘Prince of Polyester’ by Hamish Mcdonald to gauge how close!…. Anil Ambani has already emotionally made these accusations and had rightly questioned as to why the Government has not withdrawn the PSC with RIL if they felt that it has been violated by the MOU !

So what will happen now….. RNRL has already lost significant value on the Stock Exchanges today…dropping from Rs 70 levels towrds Rs 50…. RIL has regained lost ground and is up marginally at Rs 1040 levels

If Anil Ambani had agreed to the Reliance Group Split in 2005 based on the Valuations on supply of 28 million mmbtu/day at a Gas Pricing of US $ 2.34/mmbtu, he is entitled to now feel aggrreived like all his shareholders too….. Clearly he should seek adequate compensation from RIL on behalf of all his shareholders…. one way is that the brothers agree to sell RNRL to RIL at price levels near Rs 100…. because the split may have then been done at a more favourable and liberal ratio for ADAG Companies… in simple words, shareholders of RIL would have received more shares in ADAG Companies in the split than they actually did if this Gas Supply and Pricing was not to be considered

There clearly is a huge vacuum in Independent Thinking… Expert after Expert on all Channels today are simply parroting similar views…. in favour of RIL Share Price and sounding the death knell for ADAG Companies

Mark my word, Anil has his father’s courage and aggression in him…. he will rise again… just pray he creates a right set of people around him, than he has now, in all his business

As I end this Blog, just heard a very gracious Anil Ambani stating that he will abide by the Supreme Court Decision and not file a review petition… he was all praise for the SC for upholding the formation of the MOU and stating that the MOU can be an inspiration for looking at the scheme of arrangement and renegotiating…. he thanked his wife, Tina and both his sons, Anmol and Anshul, for the support… thanked his 11 million shareholder body, the largest in the world, his over 150000 employees and the media too

Anil Ambani looks forward to an expeditious renegotiation with RIL

However RIL is voicing doubts over the availability of gas itself to supply to RNRL…. creates doubts on whether any renegotiation will take place, as directed by the Supreme Court today, between RIL and RNRL…. What will RIL negotiate !? if they continue to assert that they don’t have any gas to supply to RNRL !… as Government is directing the allocation to specific companies in the priority sectors of Fertilisers and Power

Clearly RIL and Mukesh Ambani wants  to sever the umbilical cord with ADAG Companies and Anil Ambani permanently…. perhaps Anil and his Companies would be better off this way !

So where does all this leave us on the Share Price performance of RIL and ADAG Companies

RIL will register an EPS of over Rs 80 FY 12 on full Gas production … at 15 multiple that’s a Share Price at Rs 1200 levels… its’s currently at Rs 1040… so there appears little downside from here

Re Power is struggling to stay above Rs 140…. With a  question mark on Gas supplies from RIL and New Pricing, it would be advisable to reduce exposure

On RNRL at Rs 53 levels, I’m a bit of a contrarion here….. I don’t think it is, as joked, “Rahe Na Rahe Ltd”!…. It’s more than just a Trading Company in Gas… With ex Gujarat Ambuja Cement CFO, Ajit Singhvi,on board as Vice Chairman and diversification plans on the anvil, I would review it strongly to seek more clarity  on the business model and impact of changing dynamics…. in simple words, if you’re holding RNRL, defer a decision to sell out at current levels… unless you’re a conservative investor… in which case RNRL should never have been in your portfolio, unless you’re an original Allottee in the Reliance Group 2005 Demerger by lieu of your shareholding in RIL

Also, if you are not in sync with Anil Ambani’s business aggression, ambition, acumen, management coterie, risk assuming abilities and strategies he adopts to scale up and move ahead then it’s wise to not marry any ADAG Companies.. and if you have, then exit the marriage asap

On a Macro front,Sensex dropped @ 240 points to close @ 16750 levels and Nifty dropped below 5000, only to recover to barely close over it… Greece is bigger then Greece!

We all Love Larsen & Toubro and have capitalised superbly on it’s brilliant run on the bourses in the past years…and with India positioned to emerge as a World Economic Superpower in the years to come,Larsen has it’s best Days up ahead !…It simply has to occupy significant space in your Core Portfolio

Larsen is positioned to Lead India into the next Level of Dynamic Growth in the Years ahead….but who will Lead Larsen itself after Mr Naik !?

This Larsen Leadership Heir Question has been asked before…a latest take on this is by Forbes India…it’s  gives an elaborate take on this in their March 5,2010 Issue…you can access the article on the web too

The article refers to GE and Siemens capturing the opportunities in USA and Europe in the past decades to make them behemoths…Larsen is on a similar threshold in India…and interestingly,GE and Siemens are looking towards India as their Saviour on the back of the Global Financial and Economic Crisis epicentered in the West !

My take on this Larsen Leadership Heir is a little ‘hatke’….It does not really matter who really leads Larsen after Mr Naik…The Momentum is so strong for the next level of Dynamic Growth in the years ahead,that Larsen will move ahead regardless who’s heading it, and continue to scale up and  capture and leverage the giant opportunities that are arising……something like our FM’s Position…does not really matter who’s our FM….India is on a long term Dynamic growth path ahead…Infrastructure and Domestic Consuption being the Two major Drivers…..the Momentum itself will drive our Economy

Extrapolate this to our Stock Markets…anyone who Invests in Equity will make good and even great Money over the Years to Come…..and Larsen & Toubro must be your Core Investment for the Long Term !

Cheers! 

I had told you that the Government was Greedy when it priced the NHPC IPO at Rs 36

Listing Gains were indicated…but yesterday the Listing was listless and it was only some strong face saving market making that kept the price over the  Price decided of Rs 36

But today it dropped to Rs 35.75 on the BSE before recovering to barely close over Rs 36

Anyone wanna bet ? I yet stand by what I stated earlier that you’ll get NHPC in the Rs 25-Rs 30 range

I agree with Vallabh Bhansali of Enam and Uday Kotak of Kotak Mahindra, when as Lead Managers of the IPO, they were bravely defending a listless listing and opined  yesterday that NHPC needs to be bought for the Long Term….only I prefer to do so at my price of Rs 25 (one and a half times Book) in the Secondary market rather than support the IPO Price of Rs 36 (30 Earnings Multiple) in the Primary Market 

Cheers !

I had warned you on July 25,2009 that Adani Power (APL) may not have an exciting Listing…Though the grey market Premium of Rs 10 had indicated listing gains……Check out my take on the APL IPO

IPO of Adani Power at top end Rs 100….Aggressive Pricing makes it an Aggressive Investment

It listed today and struggled right through the day to stay above it’s Issue price of Rs 100…Clearly there was some directed Market Making so that it closed at a face saving Rs 100

If the Sensex seeks 13000 on the downside…It’s at 15000 levels today…. as India grapples with a Drought Situation and Rising Fiscal Deficit and Significant reversal of FII Flows in recent days,you can bet APL too will slide below Rs 90

Now watch out for the NHPC Listing in early September ! It was issued at an expensive Rs 36…Government was greedy….but so are the applicants !…Hoodwinked by the Hype,the Issue was heavily oversubscribed..NIB Portion 57 times !…I have bet you’ll get NHPC below Rs 30 shortly after Listing 

Pity all those who went for Leverage for better allotments…As it looks now,and with even historical evidence supporting,the only people who are laughing their way to the bank,having earned sure interest,are the Financiers.

Valuation Props you up…Hype knocks you down….What should you rationally choose ! ?…Make that Choice when another PSU,Oil India launches it’s IPO in early September…It was to come at Rs 800…Indications are Government wants Rs 1400 !…should be easy to make a rational choice at Rs 1400 ! 

Remember that Merchant Bankers appointed as Lead Managers have the Mandate from the Government  and the Company,not from you !…and Investor Protection and Education is merely Lip Service from the Government when it comes to Pricing  the PSU IPOs !…Aggressive Pricing leaves nothing on the table on Listing for the Investor..only the Risk !

So if you are a Long Term Investor and do like the Company ,but the IPO price is too Aggressive,then it’s safer to skip the issue and take a chance of acquiring the Shares at a lower than IPO Price in the Secondary Markets in the future

Think about It…Think Independently…don’t follow the Herd ! and don’t help in the Heavy Oversubscription of the IPO at an Aggressive Price…Remember Reliance Power in early 2008 !…The Lesson does not appear to have been learnt ! 

The NHPC IPO : Market Hype and Seduction

The Market is in Love with the Power Sector

Even at Top end of Rs 36 of NHPC’s IPO Pricing Range,  the current grey market premium of Rs 8-Rs 10 is indicating listing gains….The Issue opened this morning and has crossed 3 times oversubscription till afternoon…so clearly the market seems to be screaming at you to apply in the IPO…so should you ? and if you do,then how should you apply?…we’ll discuss this later 

But First a few observations on the NHPC IPO ….let’s do it my favourite ‘P’ way

Pedigree

• NHPC was incorporated as National Hydro Electric Power Corporation Private Ltd in November 1975,with the ‘Private’ name being dropped in September 1976..It became a Public Company in  April 1986…it was just last year in March 2008 the name was changed to it’s abbreviation NHPC
• It’s a hydroelectric power generating company owned 100% by the Government of India
• The Mini Ratna Category-1 Status granted by the Goverment in April 2008 has an important precondition that NHPC will not require any equity funding from the Government of India

• It currently operates 13 power stations (incl two through it’s subsidiary NHDC for 1520 MW) with an installed aggregate capacity of 5175 MW (downgraded to 5134.2 by the CEA) in eight North and North Eastern States
• in FY 09,it generated 18951 Million units of Electricity and sold 16933 Million Units at an average Selling Price of Rs 2.03 per unit…Rs 3436 crs or 84.81% of the consolidated total income came from sale to SEBs and their successor entities..The operational efficiency was good with an average capacity index of 93.61%
• NHPC is currently developing eleven additional projects for an aggregate of 4622 MW at a cost of Rs 14014 crs
• It is also awaiting government sanction for an additional five projects with an anticipated capacity of 4565 MW
• A Major Risk Factor is the quantum of Contingent Liabilities not Provided for and therefore not acknowledged as Debt…Rs 8372 crs in respect of Capital Works,Land Compensation ,Tax and Other Disputes
• The CERC’s Tariff Policy till FY 2009 prescribed that the Equity Component of any Project Cost should not exceed 30%…so NHPC has a total debt of Rs 14931 crs as on March 31,2009 and of the new projects cost of Rs 14014 crs,the debt component is 70% at Rs 9810 crs and the balance will be Equity of 30% of Rs 4204 crs…Government has contributed equity of Rs 2060 crs and so part of the the IPO Proceeds will contribute the balance of Rs 2144 crs…As of June 30,2009 Rs 6699 crs has been deployed

Public Issue 

• Now  the IPO Issue  Size is 1,67,73,74,015 equity shares of FV Rs 10 of which 55,91,24,672 shares are an offer for sale by the Government of India and the balance of 1,11,82,49,343 shares is a fresh issue by NHPC
• The Book Building range is Rs 30-Rs 36
• At top end pricing of Rs 36 this would mean that the issue size is Rs 6038.55 crs with Rs 4025.70 crs accruing to NHPC while the Offer for Sale would fetch the Government Rs 2012.85 crs  
• Of Rs 4025.70 crs that NHPC is raising, only Rs 2144 crs will serve to fund  seven identified projects…Ignoring Issue Expenses for now this would leave Rs 1881.7 crs for general corporate purposes !…that’s a mind boggling 46.7% of the Fresh Issue Proceeds being raised by NHPC !…IDBI is the monitoring Agency for use of Funds
• The Equity will move up from Rs 11182.49 crs to Rs 12300.45 crs with the government diluting it’s stake from 100% to 86.36%  

Pricing 

• At Top end of Rs 36,NHPC’s IPO has a downside risk of Rs 10 and an upside of Rs 10…current grey market premium is Rs 8-Rs 10 indicating listing gains
• The Government’s getting Greedy…What’s the difference between those private sharks that priced their IPOs at obscene premiums and this Public Shark…why should the Government crib at private IPOs making hay in good times ,when it’s charting the same path !? It actually was to price it much lower,but times are good..so make merry is the current motto…Retail Investors’ Safety be damned !
• The NHPC IPO is priced in a book building range of Rs 30-Rs 36…at twice post issue Book Value and at 30 Earnings Multiples at the top end of Rs 36
• To me the Fair Price is Rs 25…..that’s 1.5 times the pre issue Book Value of Rs 16.45…and that’s why I say the Down side is Rs 10…An Earnings Multiple Valuation of 15-20 times would be in the range of Rs 18-Rs 24
• And since most experts on the media stock channels,seem to be focusing on Book Values peer comparisons to justify the price of Rs 36,let’s actually follow through this analysis…but a little later

Pre and Post Issue Networth  

• The Capital Structure reveals the Equity pre issue Equity at Rs 11182.49 crs and net reserves of Rs 7210.03 crs (March 31,009)…This gives a pre issue networth of Rs 18392.52 crs and a Book Value of Rs 16.45…Q1 FY 09 results would have contributed a few Hundred crs to the networth and got the Book Value upto around Rs 16.75
• Assuming IPO Price of Rs 36,post issue the Equity moves to Rs 12300.45 crs and the reserves will move from Rs 7210.03 crs to Rs 10119.81 crs,the increase being the Share Premium of Rs 26 received and which aggregates to Rs 2907.45 crs…so the new book value post issue will be Rs 18.23 based on a Networth of Rs 22418 crs..it would be near Rs 18.50 if you consider around an additional Rs 300 crs for Q1 FY 09 PAT

Profits and the Funding of Fixed Assets & Investments

• NHPC has earned a consolidated PAT of Rs 1244 crs in FY 09 and a dividend of Rs 325 crs has been appropriated for the Government…that’s one fourth of profits…but was there any need to do so,considering the EPS barely crosses Rs 1 ! ? and the ROI is below 4% on Capital Employed of over Rs 33000 crs? and that the company is suffering negative cash flows in recent fiscals ?
• Net Fixed Assets at March 31,2009 are Rs 34135 crs and Investments are Rs 1791 crs,aggregating Rs 35926 crs…This is funded by a Networth of Rs 18393 crs,Loans of Rs 14931 crs ( incl of Rs 3188 crs of Fx Loans) and Rs 2602 crs by stretching the working capital
• Net Fixed Assets will cross Rs 40000 crs as the additional Rs 7315 crs becomes deployed from the Project Costs of Rs 14014 crs

 Peer Valuation…NTPC

• Peer Valuation shows NTPC,quoted at Rs 216,computing to three time book value of Rs 69 and 20 Times earnings…while NHPC at Rs 36 is twice Post issue Book Value of Rs 18.50 and 30 times Earnings ( assuming an EPS of Rs 1.2 for FY 10)  
• So the general hype is that NHPC too should quote at atleast 2.5 times Book Value…that would give an indicated listing price of Rs 45…and that’s supported by the grey market premium in the range of Rs 8-Rs 10…this would give a 25% absolute return inside a month on listing…assuming 5 times oversubscription in the Retail category,the return gets diluted to 5%…still attractive 
• The Down side is 1.5 times Book value …that’s closer to Rs 25…that’s my Fair Value

Price Projections

• I’m giving you a book value angle to think about as to where the share price of NHPC would tend to move a few years down the line
• The Book Value post issue will be Rs 18.50…your Cost is Rs 36….Assuming 2.5 times Book (based on NTPC’s being over 3),the share should list at Rs 46
• Let’s assume the Book Value moves to Rs 25 and then to Rs 36 in the years to come,by way of retained profits and even future equity issues at a premium
• Then assuming the same Multiple of 2.5,the Share Price should move too to Rs 62 and Rs 90….now that looks exciting,considering the cost of Rs 36
• But how much time will it take for the Book Value to move to Rs 25 first and then to Rs 36 ?
• Post Issue Networth is Rs 22418 crs of which Reserves are Rs 10120 crs (March 31,2009 Position + IPO Share Premium)…Now for a Book Value of Rs 25,the reserves have to climb to Rs 18450 crs…that’s a jump of Rs 8330 crs
• Now the PAT is @ Rs 1250 crs on 5175 MW on long term power purchase contracts with SEBs,with little flexibility on pricing because of CERC Tariff Regulations
• The new Projects of 4622 MW come on stream from August 2010 to December 2012…so we can expect the PAT to cross Rs 2000 crs earliest in FY 13 and probably only by FY 14…Even here the EPS of just over Rs 1 will double to Rs 2…a 20 Multiple will even then compute a Share Price of Rs 40 ! ( based on NTPC’s current 20 Multiple)
• So for the next three to four years the reserves would receive merely the retained Rs 1000 crs or thereabouts every year,assuming NHPC maintains it’s dividend distribution policy…so to bring the Book Value to Rs 25,which would need an aggregate Rs 8330 crs accretion, will take many years !….so let’s not even talk about doubling book value to Rs 36!
• This argument should give you some conviction to sell of NHPC,or atleast a part of your allotment,on listing at Price levels over Rs 42…because to reach Rs 62 it needs a Book Value of Rs 25 and/or a Book Multiple expansion higher than 2.5…the former seems less possible for some years yet,unless NHPC again launches a New Issue at a High premium inside a few years again !…while a Book Multiple Expansion is very much possible in a Bullish Market,driven more by Momentum and Liquidity and Exuberance rather than on Valuations    

And that is why I say the Government is Greedy !…NHPC,at Rs 36 per share, is collecting Rs 4025.70 crs of which a high 46.7% or Rs 1881.60 crs is for General Corporate Purposes !

So I see this NHPC IPO at Rs 36 as a tradeoff between your greed and that of the Government !….and a strong case of Differing Perception v/s Reality  

The overwhelming response NHPC’s IPO has received today on opening is due to the fact that QIBs and DIs see NHPC as Quality Paper from a Quality Pedigree and are willing to pay Rs 36 for this

I only wish it had come at a Quality Price ! For me Rs 36 is not !

But as Listing gains appear to be indicated I won’t grudge you making an Application at Rs 36 !

A few observations on the IPO of Adani Power (APL)

At the Outset

The Flavour of this Season’s Bullish Momentum is the Power Sector and APL’s IPO takes advantage of this by aggressively pricing in the Rs 90-Rs 100 band….Momentum should list APL in positive territory…Rs 110-Rs 120…Grey Market Premium is around Rs 10 and Application Financing Schemes are being put in place by a few Finance Houses,indicating some level of confidence of comfortable oversubscription…Nevertheless,APL should certainly not qualify as an  exciting listing.

However on DCF Valuation it appears fully priced at the IPO Pricing band in the short term…Any move past Rs 150 and towards Rs 200 should come only a couple of years down the line when the market quotes begin to reflect what Markets understand best…. Earnings Multiples….Liberal Multiples will respect timely implementation of the projects without significant cost overruns…..so keep a ‘Power’ful ‘Nazar’ on APL’s Quotes and if there are any bearish waves in the next two years and APL dives into Rs 50-Rs 60 territory,even though projects are more or less on schedule,then plug into APL

Plugging into APL through the IPO at the Aggressive Price of Rs 100 is Aggressive Investing

On APL and it’s Promoters

• APL was incorporated way back in 1996,added ‘Private’ to it’s name in 2002 and in 2007 reverting to a Public Company
• APL is part of the Adani Group of Ahmedabad…This Group was founded by Gautam Adani whose education, interestingly, was only up to matriculation
• The Adanis are symbolic of the aggressive entrepreneurship that India has witnessed post the reforms initiated in 1991…They have a colourful history in that they have had several brushes with regulatory authorities…SEBI,Enforcement Directorate etc
• The Groups Interests are diverse…International Trading,Infrastructure Development,Power Generation and Distribution,Development of Special Economic Zones (SEZ),Gas Distribution,Trading and Business Process Outsourcing 
• Adani Group includes two Listed Companies,Adani Enterprises Ltd (AEL and Earlier called Adani Exports) and Mundra Port and Special Economic Zone Ltd (MPSEZL)…..AEL’s IPO was way back in November 1994 when it raised just Rs 18.93 crs issuing 1261900 Equity shares of FV Rs 10 at Rs 150 each…MPSEZL was an ambitious Project and it’s IPO  came in November 2007 when it raised Rs 1771 Crs isssuing 40,250,000 Equity Shares of FV Rs 10 at Rs 440 and as of March 31,2009,Rs 786 crs,or 44% of Issue Proceeds, is yet to be utilised

APL’s Power Projects 

• APL is a Power Projects Development Company…It is planning Projects of 9900 MW…It already has Four Thermal Power Projects in various stages of Development aggregating 6600 MW at Mundra (4620 MW,Gujarat) and Tiroda ( 1980 MW,Maharashtra) with the Tiroda Project to be developed by a subsidiary,Adani Power Maharashtra Ltd (APML) and Two Thermal projects aggregating 3300 MW are planned for developement by wholly owned subsidiaries APDL and APRL at Dahej (1980 MW,Gujarat) and Kawai (1320 MW,Rajasthan) respectively
• The Power Projects in Mundra will aggregate 4620 MW and will be commissioned in four phases (Phase I & II : 4 * 330 MW…Phase III : 2* 660 MW…Phase IV : 3* 660 MW) from July 2009 to April 2012 while the Power Poject in Tiroda will aggregate 1980 MW ( 3* 660 MW) to be commissioned from July 2011 to April 2012
• Power Equipment Supply and Machinery Contracts are being executed by several Chinese Companies

APL’s IPO

• ICRA has assigned IPO Grade 3 to this IPO indicating ‘average fundamentals’…Gradings are from 1 to 5 ,with 5 being the best
• APL is pricing this IPO in the Rs 90-Rs 100 range…ten times face value at the top end 
• Issue will open on July 28,2009 and close on July 31,2009
• IPO will raise Rs 3016.52 crs at top end price Rs 100…It is issuing 301,652,031 Equity Shares that constitutes 13.84% of the post paid Capital of Rs 2180 crs
• There are Eight Book Running Lead Managers for this IPO…all the leading names….all wolves run in a pack !
• Mundra Phase IV and Tiroda Power Plants aggregating 3960 MW require a funding of Rs 18223 crs,of which the APL IPO will contribute Rs 2193 crs…Rs 1153 crs for Mundra and Rs 1040 crs for the equity contribution to subsidiary Adani Power Maharashtra Ltd (APML),which is to develop Tiroda…This means the remaining Rs 823 crs of IPO Proceeds will be for General Corporate Purposes…Now that’s a huge amount…IFCI has been appointed to monitor end use of the IPO Funds…a lot can flow under ‘General Corporate Purposes’ 
• Incidentally APML has alloted shares at par face value of Rs 10…. On January 15,2008,it alloted 37,500,000 Equity Shares to Millennium Developers for Rs 37.50 crs…then It issued shares,twice this year to Somerset Fund…3.3 crs shares for Rs 33 crs on March 27,2009 and 2 cr shares for Rs 20 crs on may 18,2009…APML will develop and operate Tiroda directly,while being a subsidiary of APL…Consolidation of Accounts will show APML earnings reflected too in the APL Group Accounts as APL will hold 77.38% of the APML Equity
• APL already has 3737 Members on it’s books at the time it filed it’s RHP…most are not original allottes…a lot of private transfers seems to have taken place
• Post IPO,The Promoter Group will hold 1,602,318,997 Shares of APL…that’s 73.50 % of the Equity…of this AEL holds the major chunk of 1,531,440,000 Shares at an average of Rs 5.56  

APL’s Valuation

Book Values

• As on March 31,2009,APL’s Book Value was just Rs 12.35,represented by a Networth of Rs 2278.39 crs….Equity was Rs Rs 1842 crs and Reserves and Surplus was just Rs 451.7 crs…Rs 15.31 crs were minor debits in the Misc Ex and in the P & L A/c  
• Subsequent to March 31,2009 and pre IPO ,APL has further alloted 36,406,933 shares in the range of Rs 70 to Rs 111
• Post Issue the Capital will be Rs 2180 crs (Moving up from Rs 1878 crs)and Share Premium Reserves will move up from pre IPO level of Rs 792 crs to Rs 3507 crs,assuming top end pricing of Rs 100…This would compute to a Book Value of Rs 26 with Networth being Rs 5687 crs…so the IPO Top End Pricing of Rs 100 would be four times it’s Post Issue Book Value but eight times it’s March 31,2009 Book Value of Rs 12.35 and seven times it’s pre IPO Book Value of Rs 14.23 and Ten times it’s Face Value…That’s high,though the Reliance Power issue was priced even above our atmosphere !

Earnings Multiples….these look to stimulating some excitement in valuation

• APL has yet to commence commercial operations….it is scheduled to commission 6600 MW inside three years,with a large chunk of 2640 MW only in April 2012…since it has tied up Financing for this,and if there are no project delays and significant cost overruns,we can expect that FY 13 Group Accounts will reflect full earnings on this capacity…That should give Consolidated Earnings in the range of Rs 3500 to Rs 4500 crs throwing up an EPS range of Rs 16-Rs 20   and a ten multiple will give a Share Price range of Rs 160 to Rs 200…so we could say that APL even at IPO Pricing of Rs 100 looks like a doubler in three to four years even with the  Debt/Equity Ratio at 4 …70 debt/30 equity is the Funding norm for the Power Sector…APL,however, would be close to 80/20 with the project costs at Rs 28369 crs for 6600 MW

Coal Supply Agreements are in place with Promoter Company AEL for the Mundra Project.AEL will be importing Coal….APL has shown AEL’s Indonesian Coal Mining rights and the New Mining Law of Indonesia as a Risk factor

DCF Valuation

• Considering that the Power Generation Business involves Long term (25 years) PPAs,it’s resembles an Annuity Model…This makes DCF an ideal Valuation basis
• As major capacities are to be commissioned only towards 2012,APL will show negative cashflows for the next three years on account of capex spend
• Notwithstanding that several operational and financial variables can impact the NPV,the DCF Valuation, using WACC of 11% to13% ,shows that APL’s Value would lie in the range of Rs 75 to Rs 125….IPO Pricing Band of Rs 90-Rs 100 thus leaves nothing much on the table if DCF Valuation is considered

Peer Group

• Based on Book Values,APL is priced higher than NTPC and Reliance Power
• Using Market Cap/MV parameter, APL at Rs 3.30 crs/MW keeps up with it’s Peers
• It’s Earnings Multiples of 5 for FY 13 Earnings that’s stirring some excitement in APL….APL’s commissioning of 6600 MW by 2012 will temporarily eclipse Reliance Power,which will be able to unleash greater capacities only by 2014/5…and Reliance Power quotes at Rs 170   

Coal Supply and Power Purchase Agreements

• Mundra Project is being fueled by Imported Coal through AEL…APL has listed AEL’s Indonesian Mining Rights and the New Mining Law in Indonesia as a risk Factor
• Tiroda Project will be fueled by domestic Coal. APML has also received letters from Mahanadi Coalfield and South Eastern Coalfields and Western Coalfields for specifed Coal Committments subject to conditions.APML  has also been allocated Mining Rights by the government for it’s Tiroda project…APML has no experience in Coal Mining and the allocation is subject to fulfillment of several conditions 
• Power Purchase Agreements have been signed with State Electricity Bodies for 4744 MW of the 6600 MW at Prices beginning at Rs 2.35/kWh in the first year to Rs 3.47/kWh in the 25th year
• Merchant Power Tariffs are currently much higher at Rs 6-Rs 6.50/kwh as Gujarat and Maharashtra,India’s highest Industrial Growth States,remain power deficit States…they will drop as Power Supply and Demand Imbalance reduces over the years

Conclusion

I’m not a great fan of the Adanis and moreover this aggressive IPO pricing is a hurdle in unconditionally recommending it for subscription …to be fair,it’s not crazy like the Rs 450 Pricing of Reliance Power’s IPO in Feb 2008

Another reservation…..With BHEL overloaded with orders and not able to ramp up it’s capacities fast enough,APL may have had little choice in opting for Chinese Contractors….So there are reservations even on quality and execution issues…It would be a first time in India ,on scale,that Chinese Companies would be engaged in our Power Sector,for setting up, both, sub critical and super critical coal based thermal plant technologies and equipment

It’s a major ‘Chinese Checkers’ risk that the Adanis have taken the lead in taking…Will this risk pay off ? It’s a near US $ 6 Billion Question…that’s the  cost of setting up 6600 MW Oh ! in this context,an interesting name propped up in the Pre IPO Top 10 Shareholders List…Chang Chungling…holds 930000 shares 

You want to play this IPO,then go ahead after assessing the Game range on listing

I think the PSU,NHPC at Rs 30 (strong indication of this pricing) on August 7,2009 may be a more interesting IPO option

Cheers

Just perused the Model Equity Portfolio for India that Reliance Equities International has launched.It’s been authored by their Head of Research

Excited to know what’s in it ! ?…more  so after I tell you that the Report is titled ‘Boom and Bust’ with the tagline ‘Resistance is Futile’ !?

Turned out to be a Dampener really…no Originality at all ! …very unReliance like ! if I can say so !

The Portfolio has got 36 scrips chosen with the following criteria

• The benchmark is the Sensex
• No one scrip should weigh more than 10% of the Portfolio
• Those scrips that weigh individually more than 5% of the portfolio should not collectively weigh more than 40% of the Portfolio
• Liquidity in the Scrip must be there and the threshold is an average weekly trading volume of 4 lakh shares in the scrip
• Sector Allocation done on basis of current view which is Overweight on Energy,Materials,Consumer Discretionary and Healthcare and Underweight on Consumer Staples,Telecommunication and Utilities and Marketweight on Industrials,Information Technology and Financials 

These are my views on this Model Portfolio…I find the Investment Approach too Passive and Defensive and this is probably because the Thinking is UnDynamic…and even flawed…unless the objective is to only mirror the benchmark Sensex    

• It’s got 28 Sensex Scrips out of the 30 possible….They do not like Ranbaxy and NTPC…So there are just 8 stocks in this Portfolio that are not part of the Sensex…These 8 stocks constitute 14% of the Portfolio with Cairn having a 4% weightage,three others with 2% each and the rest four with 1% each weightage
• Top 5 Scrips have an aggregate 40 % weightage…Reliance Industries (10%),ICICI Bank (9%),ONGC and Larsen (8% each) and Infosys (5%)…this leaves it no room,as per it’s selection criteria, to buy into or increase weightage to over 5% in any other scrip,unless it reduces weightages in these Top 5 Scrips 
• The Portfolio virtually mirrors the Sensex and thus should have a Beta of 1…It thus will move more or less the same proportion as the Sensex will…..Might as well have brought the Sensex itself !…It’s clearly a Defensive Approach and  the Strategy can be termed as Passive Investment and therefore the Thinking is clearly flawed….This Portfolio will never beat the Sensex !…even if it does,it would not be by any significant percentage as the 8 Non Sensex Scrips in it have just a 14% weightage….. so what’s the point of Benchmarking !
• Even the Portfolio Sectoral Allocation more or less mirrors the Sensex Sectoral Allocation…even for the Overweights of Energy,Materials and Consumer Discretionary,the extra weightage in the Portfolio is insignificant from 1.3% to 3.4%
• This June 12,2009 Report on Portfolio Strategy states the Benchmark is the Sensex but it fails to Show the Sensex level in the Portfolio…so it becomes easy to relate perfromance…I’m assuming they have taken the Closing Sensex of 15238 on Friday,June 12,2009 as the starting benchmark
• The Report is titled ‘Boom and Bust’ with a tagline ‘Resistance is Futile’….I find this a bit too dramatic a Title with little corelation to this Model Portfolio launch,even after considering that they are positive about India’s Prospects  

Reliance Equities International sees an upside of 15%-30% upside from here in the next six months…18000 Sensex by December 2009…in the range of 16500-19000 definitely…ofcourse the risks have been spelt out

This target is based on FY 11 EPS growth of 17%-22% and a PE Multiple range of 17-19…that’s a Trailing PE of 22 on FY 09 EPS

The Current Sensex Level of 15238 (12/6/2009 closing) is 15.5 times of Projected FY 11 EPS 

So if this upside does happen,the Model Portfolio too will surge proportionately…the problem is that it will be a perfect proportion…so you will not be able to beat the benchmark…so as I stated earlier too, and I reiterate,might as well have just observed a Passive Investment Strategy and Invested in Units of the any Sensex  based Fund….because you’re not really going to be rewarded for any specific equity premium more than the market…. you’ll get what the market gets !…because the beta is One for this model portfolio

Building up your Portfolio on a specific scrip and bottoms up approach with more weightage of Non Sensex Scrips would have given the Portfolio a better thrust,without any significant compromise on Risk Taken…I’m not suggesting you chase Alphas…but atleast give your Portfolio a Chance to beat the Benchmark !

Cheers !