X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
'R' for magic - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Jan 5, 2008

    'R' for magic

    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

    NTPC: Higher Tax Provision Impacts Profits (Quarterly Results Update - Detailed)

    Mar 30, 2017

    NTPC declared results for the quarter ended December 2016. The company reported revenue growth of 10.9% while profits declined by 7.5% YoY.

    NTPC: Capacity Addition a Key to Earnings Going Ahead (Quarterly Results Update - Detailed)

    Nov 23, 2016

    NTPC declared results for the quarter ended September 2016. Here is our analysis of the results.

    Power Grid: Robust Performance Continues (Quarterly Results Update - Detailed)

    Nov 23, 2016

    Power Grid Corp (PGCIL) declared its results for the quarter ended September 2016. The company reported a revenue and profit growth of 28% YoY and 32% YoY respectively.

    Power Grid: Steady Start to the Year (Quarterly Results Update - Detailed)

    Sep 29, 2016

    Power Grid Corp (PGCIL) declared its results for the quarter ended June 2016. The company reported a revenue and profit growth of 31% YoY and 35% YoY respectively.

    NTPC: Good Start to the Year (Quarterly Results Update - Detailed)

    Sep 29, 2016

    NTPC declared results for the quarter ended June 2016. Here is our analysis of the results.

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

    Aug 16, 2017

    The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE POWER


    Aug 23, 2017 (Close)

    S&P BSE POWER 5-YR ANALYSIS

    COMPARE COMPANY

    MARKET STATS