On Friday evening, Reliance Industries made an open offer for another 20% stake in Mumbai based power generation and distribution major, BSES Limited. The offer price of Rs 230.1 is just 2% above the prevailing market price. Reliance already owns over 43% stake in the utility.
The offer is aimed at gaining managing control in BSES. But the FIs, which control a sizeable 39.6% stake in the company (as on 30th September 2002), do not seem impressed by the open offer. They had not participated in an earlier open offer by Reliance at Rs 255 per share. That leaves just about 17% stake for Reliance to corner. Of this, 3.7% is held as GDRs. So what should a BSES investor do?
A quick recap reveals that BSES holds the licence to distribute power to the northern suburbs of Mumbai upto 2011. It has more than 2 m customers with no agricultural load. Until FY96, BSES functioned purely as a power distribution company. However, this changed once the company’s 500 MW thermal generation plant at Dahanu was commissioned. It now generates 55% of its power requirements in-house. In FY01, Reliance Industries emerged as the single largest stakeholder in the company (30% stake). BSES also has a significant presence in the EPC business.
Between FY97-FY01 the company has shown a healthy CAGR of 10% in topline. However, in FY02 BSES’s topline growth halted. This was because its EPC business suffered and also the company failed to grow beyond its 550 MW Dhanau generation plant. Yes, the company has bagged 3 distribution circles in Orissa and more recently 2/3rd of the Delhi distribution circle. But the Orissa venture is still a drain on the company’s resources and so is Delhi. The company also has a presence in Kerala, AP and its 1,000 MW Maithon project is coming up in Jharkhand. But these too, are currently not contributing to its topline or bottomline. So, all in all, the company earns its bread and butter from Mumbai.
FY03 so far…
Sale of electrical energy
Income from EPC, contracts & computer division
Total operating income
Operating Profit (EBDIT)
Operating Profit Margin (%)
Profit after Tax/(Loss)
Net profit margin (%)
Diluted Earnings per share*
Current P/e ratio (at Reliance offer)
For more financial analysis view BSES research report
BSES’s former MD and the current power secretary, Mr. R. V. Shahi, had put forth a business plan 2012, which envisioned on generating 9000 MW of capacity, taking up atleast 3 transmission systems and operating 6 distribution circles in the country.
Though currently, all these developments are not showing on the income statement, going forward we expect that these will add progressively to the company’s growth. So in that sense, the Reliance open offer price is not very attractive for those investors who are looking at the long term.
However, on the other side, with Reliance at the helm, the company gets the advantage of valuable inputs both in terms of technology and staying power. In our view, with the FIs not biting, Reliance is likely to get hold of a majority stake (51%) in the company through the offer. This should suffice its aim of management control. However, if Reliance relents to FIs and hikes its open offer price, then we may see a sizeable reduction in free float in the stock. In such a situation, the retail investor should look at exiting the counter purely from the view that the stock may become illiquid.
At Rs 230, Reliance has valued the stock at 12x FY03E earnings. We are not seeing a major growth in profits in the next one or two years, but with a time horizon of over 4 years, BSES is likely to be a major beneficiary of the power development scene in India.
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