'R' for magic - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

'R' for magic

Jan 5, 2008

If the Indian stock market were to have its own alphabet list, then 'R' would have stood for 'magic'! In an act that would embarrass the wizards in Harry Potter's school of magic, Reliance Power IPO intends to raise US$ 3 bn through India's biggest ever IPO. This for funding a business that does not exist. And a business that will earn its first penny almost 2 years down the line - if things go 100% as per schedule! This IPO sounds more for professional long term investors like private equity firms than for retail flippers and the general public. The Reliance Power IPO (the latest item in this magic show) has been priced between Rs 405 and Rs 450, and is slated to raise around Rs 120 bn. What is more, retail investors are supposedly being lured to subscribe to the IPO by way of a 5% discount and a deferred payment scheme.

Will you buy a paper of Rs 10 for Rs 450 and accept a discount of 5%? Bad deal, isn't it? But then you may ask that as per your agent, the 'value' of this stuff is Rs 650 based on the fact that if you were to manufacture it on your own, you would end up spending Rs 650 on it (replacement value theory, you know!). Well, that is a valid argument.

But is your agent telling you that if you were to manufacture this stuff (worth Rs 650), it would take you a minimum of 10 years to get the final output? No? So why does he want you to pay up the full Rs 650 now (in 2008) for something that will see value in 2015, or 2016 or 2017? Is he asking you to be patient for your returns? Yes! But are you asking him why he should get the entire commission upfront when you shall realise the value in 10 years time? Probably not!

Your broker or advisor may tell you that the gray market premium for the IPO is almost equal to the offer price indicating the strong demand for the issue. And you might be lured into believing that since everyone else is buying into the IPO, why not you?

We are confused! We are not sure how to put a price to this IPO, as we do not have the underlying numbers to support the same.

The issue has a list of well-known investment bankers. According to the management, one of their investment bankers believes that the price will pierce the "four figure" mark on the day of listing.

It may. But does it deserve to?

We mean, someone may walk in the door and offer us Rs. 1 lakh per square foot for our humble office space but that does not necessarily mean it is worth that much.

And should investment bankers be making those sort of claims and statements on future share prices? But that is the nature of the investment banking business. They work for companies. Their fees are a function of how much money they raise for the company.

So what an investment banker says, should be taken with a pinch of salt.

Around all this hype surrounding the issue, here is our take on the pluses and minuses.

It is a negative that the company, which is now talking about adding 28,000 MW over the next 7-8 years has a parent, Reliance Energy, which has not added 1 MW of new generation capacity for the past many years!

Reliance Energy had also proposed to set up the world's largest gas based generation unit 3 years back but that has yet to materialise. We recognise that this particular project has suffered because of political influence and infighting between the brothers on the fuel issue. But that is the point. Mega projects attract mega headaches. What is the guarantee that these sorts of issues will not dog the ambitious power plans of Reliance Power?

What about getting required land and equipments for these projects? What about the fact that company itself does not have any past experience in mining coal? What about gas supply and pricing?

We are not saying that it is a bad project or that the management of Reliance Power cannot make this work. We respect their ability to execute and deliver projects - unless there are political issues that crop up or family issues that spill over into the public arena.

But these are time-sensitive issues that can hurt the returns on any project. These are serious issues, even more serious than the financing part (after all, so many hands can lead funds to these 'all-in-the-air' projects) that investors need to understand before they get the shock! But is anyone listening while betting on the magic of the name?

Power is definitely in short supply - no one can argue with that. But the valuation of power stocks that are already listed on the stock exchange (including Reliance Energy, Tata Power, BSES, and NTPC) seem, well, a little rich now. But is anyone worried about that? On being asked about the basis for the issue price of Reliance Power in the analyst and brokers' meet yesterday, the management talked about how the valuations of Reliance Energy have shot up over the past few months and how it has led to a 're-rating' of the entire power sector!

For the benefit of our subscribers, we shall soon be publishing a detailed report on the Reliance Power IPO, providing our views whether they should apply or not apply to the issue.

Equitymaster requests your view! Post a comment on "'R' for magic". Click here!

  

More Views on News

India's Top 5 Monopoly Stocks to Watch Out for (Views On News)

Nov 30, 2021

These 5 companies dominate their sectors with a huge piece of the pie.

Will the Revival Plan of JSW Energy's Renewable Business Boost its Presence in India? (Views On News)

Nov 26, 2021

How will this move help the company in building and streamlining its renewables portfolio.

The Reason Behind the Thrilling Performance of IEX in the Last few Sessions (Views On News)

Oct 22, 2021

IEX share price has been on a roll recently. The company's shares surged over 165% in the last six months.

There's a New Kid on the Green Hydrogen Block (Views On News)

Nov 17, 2021

Billionaire Gautam Adani has announced plans to invest up to US$70 bn in renewable energy and produce the cheapest hydrogen in the world.

Solar's Hot in India. It's About to Get Hotter... (Views On News)

Nov 1, 2021

Will this company help India to become the largest player in solar space?

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

India's Top 5 Monopoly Stocks to Watch Out for (Views On News)

Nov 30, 2021

These 5 companies dominate their sectors with a huge piece of the pie.

5 Indian Companies Embracing Blockchain Technology (Views On News)

Nov 23, 2021

Blockchain adoption in India was slow in the past. Now, the technology is being well received.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE POWER


Dec 6, 2021 (Close)

S&P BSE POWER 5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS