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

India’s Power Generation capacity is 147403 MW…Deficit is 20000 MW

As of December 2008,the Central Electricity Authority (CEA) reports that India’s Power Generation Capacity is 147402.81 MW,up 8651 MW from 2007…India continues to reman a power deficit country…Current Deficit is 20000 MW

NTPC,a leading PSU, is the biggest  generator with 28333.99 MW from the Eleven Central Sector PSUs…It may be recalled that Reliance Power,in the Private Sector, has plans to generate 28000 MW by 2016…By Then NTPC capacity would have surged pass 65000 MW

The Eleventh Five Year Plan 2007-2012 has a revised planned creation of 92000 MW…But with India targeting high single digit GDP Growth Rate over the next several years,the demand for power too will surge…It will be only in the Twelth Five Year Plan 2012-2017 that the power demand and supply curve will cross

Mckinsey in their report ‘Powering India-Road to 2017’ estimates that the Power Demand  will be 335000 MW in 2017 …Interestingly last year,amidst great controversy and opposition .both in India and in USA,both countries signed a Nuclear Treaty to facilitate purchase of Uranium by India and setting up of Nuclear Reactors for Civil Purposes  

The Breakup on various parameters of India’s Installed Power Generating Capacity of 147402.81 MW makes interesting reading

INDIA‘S INSTALLED POWER GENERATING CAPACITY OF 147402.81 MW AT DEC 2008

By Mode

By Sectors

By State

Feed

MW

%

Sector

MW

%

State

MW

%

Coal

77458.88

52.55

State/UT

76185.57

51.69

Mah

10563.54

7.17

Gas

14734.01

10

Andhra P

7370.16

5

Diesel

1199.75

0.81

Central PSUs

48970.99

33.22

Karnataka

5838.52

3.96

Nuclear

4120

2.80

West Ben

5808.56

3.94

Hydro

36647.76

24.86

Private

22246.25

15.09

Gujarat

5701.30

3.87

Renewable

13242.41

8.98

Others

112120.73

76.06

 

147402.81

100

 

147402.81

100

 

147402.81

100

 Some Observations

  • Thermal Power Generation is 2/3 rds of the Capacity
  • Hydro Power Generation is 1/4 th of the Capacity 
  • Coal Based Plants at 52% are over half the Capacity
  • Much Hyped Mode…Nuclear Power plants currently contribute less than 3% of Capacity…even with the implementation of the controversial Indo -USA Nuclear Treaty,this percentage will only marginally go up to @ 5% in the next Ten years
  • Renewal Sources contribute under 10% of Capacity currently…There is great potential to increase this percentage to reduce dependency on Coal,Oil and Gas Sources 
  • 85% of Capacity is from the Public Sector
  • The role of the Private Sector may assume more focus and it may contribute more in the future than the current 15% to Capacity 
  • Of 28 States and 7 Union Territories,Maharashtra leads with over 7% of Capacity

An additional capacity of only 8651 MW was created in 2008…To achieve Five Year Plan Targets,the incremental annual capacities should be close to 18500 MW…otherwise it may take much longer than 2017 for the demand/supply curve to cross

Major Constraints in Developing the Power Generation Capacities have been

  • Government Equipment Procurement Procedures 
  • Project Implementation Delays
  • Saturation in Capacities of Engineering Companies in Setting up of Power Plant Infrastructure and delays in their increasing their Capacities
  • Delay in Allotment and Development of Coal Mines…largely on account of delays in land acquisitions and in obtaining government clearances and  multiple mine allottees for the same mine
  • States Dominating the Distribution of Power…State Electricity Board ( SEB) Losses are legendary…it impedes the State’s capability to invest further to augment existing capacities and also discourages Private Investors from providing Capital to do so….Distribution Losses are reportedly a criminal 40% of generated and transmitted Power

If India has to Grow to be one of the top Three World Economies in the next Two decades,as is expected, Power Capacities have to scale up significantly and fast…Government is well aware of this and has been introducing Power Reforms…The Electricity Act of 2003,CERC,Exchanges for Power Trading,Privatisation to highlight a few

Despite constraints,some  due to  coalition politics,the Power Sector has the Power to  create  Multifold Gains for those who invest in this sector as a Business or even  just as an Investor…but these will play out over the Long Term…Ten Years and Beyond

Consider three Listed PSU Power Plays for your Long Term Portfolio…BHEL,NTPC and PTC…You’ll get an opportunity to buy these at Distress Prices when the Sensex follows further DOW Declines and seeks even lower levels  from 8900 levels today         read more