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…?

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2.34 out !…4.20 in ! as Supreme Court rules in favour of RIL and Mukesh Ambani and not RNRL and Brother Anil Ambani…Feel Sad for Anil..so does RNRL now stand for ‘Rahe Na Rahe Ltd’!…I don’t think so

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

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Reliance Industries announces a Bonus of 1:1 !…Now ! Now ! Now !

Reliance surprised all yesterday with a post market bonus declaration of 1:1….It last gave a bonus in 1997…and before that in 1983 and 1980

Dhirubhai Ambani,the Founder was the dramatic architect for all these bonus issues…but he passed away in 2002……Investors were like Children in those days…and the father was Dhirubhai !….his bonus announcements were always dramatic…like breaking an AGM to have a board meeting to discuss Bonus and coming back to announce a 1:1 Bonus…all pre planned

But yesterday’s Bonus was clearly less preplanned….and Investors are no longer Children…and Mukesh Ambani is surely not the father !

And I was truly amused to hear the reason why Mukesh declared this Bonus….To reward Shareholders for this Value Creation of over a lakh Crores in assets and the completion of setting up of two major projects….gas and the new refinery….Bonus is declared from Free Reserves created by Operational Profits …Reliance has enough of these…but not from the two new projects yet !….even brother Anil rewarded,if you can ,I daresay, call it that,! shareholders of Reliance Power with a 3:5 Bonus last year,within months of the IPO…even before the Company has commissioned even one power project !…the bonus was to bring down the holding cost from the obscene IPO Pricing of Rs 427.50 to Rs 270 ! It’s quoted at Rs 160 right now…so now both brothers have ‘rewarded’ with bonus after creating the assets !  

The Bonus normally reinforces the expectation of good performance into the future,though it is merely an accounting entry….may change sentiment,but not valuations 

In Reliance,the Equity now will double from Rs 1642 crs to Rs 3284 crs with just a small dent of Rs 1642 crs in reserves of over Rs 1.1 lakh crs…The Book Value will halve from Rs 700 to Rs 350…Adjusted EPS for FY 10 would be in the Rs 60-Rs 65 range.

The Share Price should open strong this morning…In fact it has opened at 4% high at Rs 2189 and is now easing….From this price the ex-bonus price adjusts to a shade below Rs 1100…that’s 16 P/E on  FY 10 EPS and 11/12 P/E on a much stronger FY 11 EPS of close to Rs 90

And this declaration of Rs 13/share as interim dividend on existing capital of Rs 1642 crs is good but it works out at just a 10% payout of projected EPS in the range of Rs 120-Rs 130 for FY 10 before adjusting for bonus

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A subdued looking Anil Ambani addresses ‘Share Owners’ at the Reliance Capital AGM this morning

Just saw Live Coverage on TV of  Anil Ambani addressing his ‘Share Owners’ at the Reliance Capital AGM this morning

Imagine a serious looking Gentleman presenting some very good looking Group and Company and Business Potential Statistics in a dull,monotone…that’s what I felt Anil Ambani was doing this morning

Dressed in a Black Suit and even a Dark (Black?) Tie probably reflected his subdued and sombre look…looked as if he has not slept well last night….There was not even a flicker of a smile and he was lacking his usual confident and aggressively positive demeanour…..There was a person who created a mild sloganeering disturbance as Anil spoke,but was quickly whisked away from the Indoor Auditorium.

2008 and 2009 so far have been challenging years for Anil Ambani….His Reliance Power issue in Feb 2008 took Rs 427.50/share from Retail alottees and a face saving bonus dropped the holding Price to just over Rs 267…The share had listed marginally positive ,but then the decline began and the holding price has yet to be reached again…It’s currently Rs 168 levels…and yesterday in the continuing RIL v/s RNRL war for the former not honouring the MOU between the Ambani Brothers for supplying 28 mmtu of Gas daily from the KG basin to the latter ,the Supreme Court allowed rival brother’s RIL to continue it’s Gas Sales to third Parties as per the Jan 2009 agreements  

Anil Ambani desperately needs his woo his shareholders to stay with his Group….and so now we have the personal touch….Addressing Shareholders as ‘Share Owners’….His ‘Share Owners’ would have appreciated more if he had only priced his Reliance Power Issue below Rs 200 and not at Rs 427.50….Maybe Anil,you can make amends by issuing Reliance Life Insurance at Par to the original allottees,who yet hold the shares, of Reliance Power !

Another interesting part of the AGM Address was Anil’s revelation that they are planning to unlock value for shareholders of Reliance Capital by going for an IPO or a strategic Investor sale or a combination of both of the wholly owned subsidiary,Reliance Life Insurance Ltd….Some value of this Insurance Subsidiary is already embedded in the Current Share Price of Rs 890 of Reliance Capital…last Three Months,the share Price has surged by over 70% from levels of Rs 500

Some very Interesting Points from Anil Ambani’s Presentation are below

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Supreme Court : RIL v/s RNRL is Ram Jethmalani v/s Harish Salve

There were 48 TV Crews at the Supreme Court this morning…..The Cameras were positioned to broadcast live sound bytes from the lawyers of RIL and RNRL

First we had a trifle agitated, Ram Jethmalani,who represented RNRL, emerging and a hectic rush to have  Mikes thrust onto him for his comments

This is what Jethmalani said,rather accused 

” The Supreme Court has not stayed the High Court Order which had favoured RNRL.The Government is a Puppet of RIL and The Oil Ministry is in the pocket of Mukesh Ambani….according to me they (RIL) cannot deal with the Gas…They (Mukesh Ambani and RIL) can go against Moral Issues and Mother’s Mandate….It is a stupid argument ( that the MOU cannot override Sovereign Interest).In a democracy and a republic there are no sovereign authorities..all authorities are bound by a court of law ” 

Then came out a beaming Harish Salve,who stood for RIL.This is his interesting sound byte

” The Supreme Court has not passed any order today.On specific mention that RIL will continue distribution of Gas as per the January 2009 Agreement,the Court stated “We are not stopping you”….The Question is that in these changed circumstances,when Gas is selling at US $ 4.20/mmbtu ,how can one buyer insist at US $ 2.34/mmbtu…the question thus arises that how can the MOU between two brothers,to strike parity between them, override the Sovereign Policy and Interests of the Government….Supreme Court is concerned with the seriousness of this Issue……It has issued Notice to RNRL as to why the Government should not be made a part of this Case…..Jethmalani’s utterances are largely for the Galleries and not for the Courts…..MOU was subject to company and government approvals,which is being ignored….If the gas is sold at US $ 2.34,it would be a double whammy as the buyer will then sell it for US $ 4.20 and pocket the difference ! ( RNRL was to supply the Gas to Reliance Power’s Dadri Plant.This Plant will take atleast 3 years to beging Operations…so if the MOU was to be honoured,it would get Gas at US $ 2.34 and will be able to sell it at current commercial rates of US  $4.20 and pocket the difference ) When cases become weak you thump the table…This (Anil Ambani’s July 15,2009 letter to the PM) is table thumping”

On a day when the Sensex has surged to 15100 over 350 points,RNRL is down 3 % a Rs 80 while RIL is up 4% past Rs 2000,just past 2 pm

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The Magic of the Mumbai Marathon !

 I ‘ran’ the Dream Run this morning at the Mumbai Marathon from the comforts of home…..What a spectacular uniting Force !

Thankfully it was sponsored,for the sixth year straight and since inception, by a credible ‘S’ ,Standard Chartered Bank and not the likes of ‘Satyam !’…In fact Standard Chartered has signed up as sponsor for the next three years too till the 2012 Race….Tremendous Value Mileage for them

31000 participants across all the runs in this sixth edition….with the Popular Dream Run itself having 21000 participants

The Marathon has always been heart warming,but more so this year,as the memories of the 26/11 Terrorist Attack on South Mumbai are yet very vivid…..What 60 years of Independent India and politicians and Leaders could not bring about in India,these Nine Terrorists in just 60 hours united our Nation like never before !

It was one big Street Party in South Mumbai…as key activity areas of Fountain,CST Station and  Marine Drive were closed to vehicular traffic from before sunrise today……There were lakhs of people swarming these areas and it was a spectacular and colourful sight….From Young Children to Senior Citizens,on their own or for a cause, took part in the Dream Run…If you recall,that CST Station was one of the key locations of the 26/11 Terror Strikes…It has always been the ‘Start’ and ‘Finish’ Point for the Marathon 

My daughter (in red shorts in first photo and sitting second from right in the second) ‘ran’ the Dream Run of 6 km to 7 km with the PIFA …..a Football Academy and a Dynamic Enterprise run by Dynamic Anjali and Nirvan Shah, whose Goal is to Have India qualify for the FIFA World Cup in 2022 !…These kids have exceptional Energy levels….It’s been a hectic weekend for my daughter…Yesterday,she was away the whole day, competing at the State Gymnastics Tournament at the Andheri Sports Complex in Suburban Mumbai from 7 am till 8.30 pm……then joined around 40 of us at 9.30 pm till past midnight for a Victory Football Dinner for the Runner-Up Maharashtra State Girls u-14 Football Team at the Chennai Nationals,of which she was a Goalkeeper Member…Now after the Dream Run,she’s off this evening,to participate in a Gymnastics Demo at a Cricket Function at the Police Gymkhana on the Marine Drive Sea face…Phew ! Sitting at Home,I’m tired for her !  

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