Is Reliance Power just "Reliance Power"? No.It is actually "Reliance Power Limited" - a limited company. So what does this mean for Reliance Power Limited?It means if in the rare case, the calculations of the management go wrong and the company somehow goes to insolvency, none of the shareholders will lose anything expect the value of the shares. If you are a share holder of Reliance Power and it goes into insolvency (unable to pay back debts), what do you stand to lose?Rs 430 per share.Lot of money....right?
What does Anil Ambani's AAA Project or REL lose?Both of them had got their 45% (post-IPO) stake for Rs 1000 crore each. Plus they will each subscribe to 1.6 crore shares each at Rs 450 in the IPO......which works out to be Rs 720 crore. Thus, AAA Project will be getting 101.6 crore shares of Reliance Power for Rs 1720 crore and REL will be getting 101.6 crore shares of Reliance Power for Rs 1720 crore.Little less than Rs 17 per share.This is what both the promoters are risking in this project....Rs 17 per share ; while investors will be risking Rs 450 per share.This is exactly the reason why Reliance Power was created. First, by contributing just Rs 1720 crore each to Reliance Power, the promoters have shifted all risk to investors.Second, by getting 45% stake (in REL's projects) to AAA Project for a mere Rs 1000 crore, AAA Projects (and Anil Ambani) have created wealth out of thin air. Anil Ambani's Rs 1000 crore investment will be worth Rs 100000 crore when Reliance Power lists at Rs 900.If the gamble works, the promoters (holding 90% stake in Reliance Power) will be worth billions of dollars. If the gamble doesn't work, the promoters will lose Rs 1720 crore each and investors will lose Rs 10000+ crore which they will be paying for a mere 10% stake in Reliance Power.What a way to create wealth...!!!....I don't have words to describe the brilliance of Anil Ambani's plans...
So what will I do with this IPO?
Firstly, I will subscribe to it,not because I think it is a good company or is offering great value at Rs 430, but because I am in this market to make money. The markets are in such a frenzy, nobody bothers about valuations anymore........not even QIB and other institutional investors. Everyone knows that Reliance Power will list at a premium and thus everyone will apply....valuations can wait for some other day.... .Everyone should wait till last day and apply for it. Just check the subscription levels by 11 AM on last day.
What will I do post-listing?
For bigger IPO's like Power Grid and Mundra Port, I have followed a sell-half-keep-half strategy. Assuming listing at Rs 900, for Reliance Power, I will follow sell-all-keep-none strategy.First, other companies are much cheaper.
Why should I keep a company valued at Rs 200000 crore - when another company (with similar capacity by 2013) is available at Rs 30000 crore with much smaller debt burden and Rs 10000 crore worth of investments ...........referring to Tata Power.If Reliance Power (at Rs 900) is available for Rs 200000 crore, why not buy NTPC for a similar price......Rs 225000 crore. NTPC plans to have a capacity of 66000 MW in 2017, while Reliance Power will have 28200 MW capacity in 2016.
Second, the risk is higher than other existing companies. With marginally cash flows for next 5 years and Rs 70000+ crore of debt, the risk for Reliance Power is high. Tata Power and NTPC have existing cash flows to handle expansions....Reliance Power does not.
Third and the biggest factor is....the valuation of the company doesn't make much sense. Why should Reliance Power be valued at Rs 200000 crore, when in highly optimistic scenario, it will not make more than Rs 15000 crore of profit in 2016 ? Even if it touches that figure of Rs 15000 crore, its market value in 2016 will not be much more than 225000-300000 crore. (if given a 15-20 times multiple). A fixed deposit will make more money than that in 8 years.....and that too without any risk.
Also, I got the optimistic Rs 15000 crore figure by assuming two times margins as NTPC. The fact is..... at least till 2014, Reliance Power will still be carrying most of its Rs 70000 crore debt and its interest costs will squeeze margins to a large extent.
By CS Jharna Mistry
