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…? read more

Reliance Power at Rs 179 ! Yeh kahaa aa gaye hum !

ADAG’s Reliance Power early last year short circuited IPO allottees at Rs 427.50 and then tried to make amends by a 3 : 5 Bonus from share premium reserves and not operating reserves to bring down holding cost to Rs 267

It’s surged to Rs 179 today…..What !? Why !? Hello !?

A leading Investment Banking House has come out with a DCF target of Rs 215 !…What the ….!?

Clearly Assets and Earnings Valuations would have thrown up poor values ….With no earnings in the next few years  and no dividends in the forseeable future and with long gestation periods and a Book Value of Rs 57 ( largely because we gave the premium of Rs 417.50/share in the IPO to the Company !),the only way to try and justify a price of Rs 200 + would be the DCF method !

Now how pretty smart is this DCF !….WACC is taken at 13 %, Growth Rate for Terminal Value is assumed at 5% and Present Values of Free Cash Flows have been taken from 2009 to 2024…They measure up to just Rs 4200 crs while the Present Value of the Terminal Value from Year 2025 is a whopping Rs 47300 crs……Till 2014 the Flows are negative !

I’m not saying Reliance Power will not Power ahead after this gestation period…I’m only considering the assumptions,risks,visibility and uncertainty of earnings,financial and feed supply closures and implementation hurdles that this company yet faces

Just 600 MW is the Rosa Plant coming up next year….The Company has chartered an ambitious 28000 MW till 2017…majority is coal based….However the Dadri 7480 MW plant depends on Gas from the KG Basin ( under dispute with Reliance Industries)

Just be careful….In this Post Election Results Bullish Intensity,Power Sector Reforms Mania is sweeping again and Reliance Power may yet again attempt to raise Equity Capital at High Prices as it yet needs to achieve Financial Closures to a few Mega Power Plants

So unless you have a Five Year Generous Outlook,I would advice you to be cautious when considering Reliance Power….It yet needs to make amends for the IPO Pricing !….and if you were an IPO allottee and yet have it in your portfolio,you could consider an exit in this rally

You are already affording a High Book Multiple of 3 and on an Earnings Basis a Share Price of Rs 200 would only be justified on a Ten Multiple on an EPS of Rs 20…that’s a Net profit of Rs 5000 crs !…and that’s unlikely till atleast 2014/5…You gonna wait that long but give it the price now ! ?….The Networth is below Rs 14000 crs now ,it’s Market Cap; is near Rs 43000 crs and the  generous assumptions in the DCF computations allows you to show the Present Value under DCF at over Rs 51000 crs ! read more