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 !
Think about it !