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 read more

Adani Power Struggles on Listing today…saves face by closing at Issue price of Rs 100

I had warned you on July 25,2009 that Adani Power (APL) may not have an exciting Listing…Though the grey market Premium of Rs 10 had indicated listing gains……Check out my take on the APL IPO

IPO of Adani Power at top end Rs 100….Aggressive Pricing makes it an Aggressive Investment

It listed today and struggled right through the day to stay above it’s Issue price of Rs 100…Clearly there was some directed Market Making so that it closed at a face saving Rs 100

If the Sensex seeks 13000 on the downside…It’s at 15000 levels today…. as India grapples with a Drought Situation and Rising Fiscal Deficit and Significant reversal of FII Flows in recent days,you can bet APL too will slide below Rs 90

Now watch out for the NHPC Listing in early September ! It was issued at an expensive Rs 36…Government was greedy….but so are the applicants !…Hoodwinked by the Hype,the Issue was heavily oversubscribed..NIB Portion 57 times !…I have bet you’ll get NHPC below Rs 30 shortly after Listing 

Pity all those who went for Leverage for better allotments…As it looks now,and with even historical evidence supporting,the only people who are laughing their way to the bank,having earned sure interest,are the Financiers.

Valuation Props you up…Hype knocks you down….What should you rationally choose ! ?…Make that Choice when another PSU,Oil India launches it’s IPO in early September…It was to come at Rs 800…Indications are Government wants Rs 1400 !…should be easy to make a rational choice at Rs 1400 ! 

Remember that Merchant Bankers appointed as Lead Managers have the Mandate from the Government  and the Company,not from you !…and Investor Protection and Education is merely Lip Service from the Government when it comes to Pricing  the PSU IPOs !…Aggressive Pricing leaves nothing on the table on Listing for the Investor..only the Risk !

So if you are a Long Term Investor and do like the Company ,but the IPO price is too Aggressive,then it’s safer to skip the issue and take a chance of acquiring the Shares at a lower than IPO Price in the Secondary Markets in the future

Think about It…Think Independently…don’t follow the Herd ! and don’t help in the Heavy Oversubscription of the IPO at an Aggressive Price…Remember Reliance Power in early 2008 !…The Lesson does not appear to have been learnt ! 

Borrowing against Brands !…Interesting,but Risky area opening out !

For Years ,Brand Valuation has been part of my sessions on Valuation of Equity at BSE and Other Forums….so it was with great Interest that I read the Economic Times Front Page atricle today on ‘Cos flash brands to raise cash’

Strapped for cash,Kingfisher Airlines has managed to Borrow from State Bank of India against it’s Brand of ‘Kingfisher Airlines’ which has been valued at Rs 1900 crs,that’s US $ 391 Million at an Exchange Rate of US $ =Rs 48.50 

Interestingly,Kingfisher Airlines has actually included this Brand Value as an Asset in it’s Balance Sheet…If it had not,then the Debt/Equity ratio would have computed higher….However,It’s probably because the Brand  is shown in the Balance Sheet,that PSU Bank,State Bank of India has been convinced to lend against this Asset

‘Kingfisher Airlines’ is a seperate registered Brand than ‘Kingfisher’ for Beer and Wines…Just a thought…if the Airlines defaults ,then the bank could opt to make the Brand it’s property…It would need to monetise this to recover dues…so it will have to sell the Brand !…to a Competitor Airline or a new Airline maybe !?…does the Borrowing Agreement categorically state that this Brand also include all the licenses and permissions  etc ?…what’s the hairline % taken by the Bank for this Asset value when lending?

Now Brand Value,like Intellectual Property Rights and Goodwill is an Intangible Asset.It normally is never reflected in the Accounts,because no real consideration has been paid for it…Thus this makes this Asset Class,riskier to lend against…It may be difficult to liquidate or realise monies for it in case of default

Being an Intangible,Brand Valuation is one of the most subjective and controversial areas in Valuation…Valuing Tangible Assets is a more objective exercise

Will Banks lend against Brand Value even if it is not reflected in the Books as an Asset !?

Clearly,Corporates appear to be running out of Tangible Assets to pledge or offer as Collateral and therefore borrow against…….They are resorting to prop up their  Brand Values for actual Funds leverage

An interesting Valuation and IPO assignment I was involved in recently,threw up this demand from the Promoters when we were working to price the placement and the IPO…”Does not our Brand count for anything ?”…Of course it did…In fact it is one of India’s largest companies in it’s field and has been in existence for over a hundred years !….but potential buyers were reluctant to negotiate a higher valuation that included,both soft and  hard numbers 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