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

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

 

 

2009/10

2009/10

Share Price intraday on July 9, 2010

Rs 177

Rs 200

Face Value

Rs 10

Rs 10

Market Cap

@ Rs 42500 crs

@ Rs 164300 crs

Market Cap Ranking

30

4

EPS

@ Rs 2.8

@ Rs 10.5

P/E

63

19

Current MW Capacity

Negligible

31704

Generated Units in FY 2009/10

Negligible

 218.84 BU

National Share in Power Generation

28.6%

Ranking as Independent Power Producer

No 1 in Asia

No 2 Globally as per Platt’s List of Top 250 Global Energy Companies in 2009  

Planned MW capacity in 2010/11

Negligible

4150

Planned MW Capacity by 2016/17

37000

75000

Net Sales

Negligible

Rs 46504 crs

Net Profit

Rs 684 crs

Rs 8657 crs

Equity

Rs 2397 crs

Rs 8245 crs

Reserves

Rs 12066 crs

Rs 54382 crs

Book Value

Rs 60

Rs 76

Promoter Current Equity Stake

84.78 % (ADAG)

84.5% (Govt)

Fuel Security for Coal and Gas

Improving

 Strong

Input Fuel Pricing

Expected to be High

Reasonable

Billing Realisations

100% for the Seventh Consecutive Year

Corporate Governance

Needs Improvement

For example..Just yesterday,on July 8,2010 they announced,giving details,of the financial closure for the Krishapatnam 4000 MW UMPP stating the Plant will be commissioned 8 months before schedule….they deliberately omitted stating what would be the likely month and year of Commissioning

And who can forget the IPO Misadventure

National Award 2009 by Institute of Company Secretaries of India

 

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

CAGR %

Now 2010

3 Year to 2013

5 Years to 2015

Risk Free 8 (Bank)

177

223

260

15

177

269

356

25

177

346

540

   

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 ! 

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