Why reliance power is in big mess?

Over the years I have been monitoring the progress of the Reliance Power, with the only intension to invest at the right time and build it as a stock in my long term portfolio.

It all began with the IPO - Reliance Power, then the subsidiary of Reliance Energy, floated India’s largest public issue of Rs 11,700 crore, by selling Rs 10 face value shares in the range of Rs 415 to Rs 450.

The share on the offer only represented 10% of the company and so one can imagine the firepower that RP was trying to derive. This is not the end, it is the beginning. Much to the liking of every investor in this ipo, the gray market projected price was double.

As soon as the hype was over so was the projected listing price and the only direction the share understood was downward projectory.

Reliance brand is one of its kind they just did not offer bonus but they also offered dividend to the shareholder. All in the hope of keeping the goodwill. Reliance brand has value of its own and Anil Ambani just knows how to exploit it. Like Reliance Power many more ipos are waiting in his stable. What am I going to do if I hear another ipo from Anil Ambani? Lets analyze RP for answering this question.

To understand reliance power better lets list down all the power plants that it going to setup. Details in the attached image.


What are the positives of Reliance Power establishment?
1. A MOU is signed with Chinese Bank and US Exim bank for over Rs. 75000 crore for financing various projects. RP is getting cheap loan from Chinese and that is a very good step.
2. Also a contract of Rs. 3400 crore has been signed with General Electric for 2400 MW gas based Samalkot project.
3. Thrust on augmenting the renewable energy sources
4. Speed of execution is fast. The results are evident from Rosa I setup.

Now lets look into the points that prick me.
1. The company is going to run into huge debt. No company in the history of the stock market has survived the debt shivers. To just take few examples, a highly consolidated firm like Tata Steel is finding difficulty with Corus financials. Well we do know the reasons lie on many direction but the payoff is quiet low.
How is RP going to manage to pay $12 billion and more with such low tariffs? This logic completely baffles me. The only way out is pay all the profits out at the cost of the future growth and the dividend. Now who wants that?

2. The last of their project will be connected to the power grid by 2016. What happens next? It will start holding a power throughput to what NTPC already has now. And NTPC is a safe-bet in the stock market because it is a laggard. The growth is quiet minimal.
The question that remains now is why should I invest in RP when I can get a defense stock like NTPC.
The only reason everybody queued up for RP shares were because of its brand equity and now that Anil Ambani has tarnished its image, now would we want to be part of Reliance Power family?

3. All the projects are being executed by Reliance Infra. Now what shall I make out of this? The main beneficiary of this arrangement is the promoter. Promoters already hold 85 percent in the company.

4. Merger with RNRL. What did RP gain from this merger?

5. Much delayed gas projects.

6. After winning many UMPP projects, Government many not be interested in awarding future projects to RP. Putting all the eggs in the same basket is not going to work here.

7. Cost of maintenance and Chinese products are big risk factors

8. Reliability of Anil Ambani has been hit.

9. Investment rationale for any new investor needs to understood. The current mcap is Rs 40,000 Cr. Investor and FII investment is more than Rs. 12,000 Cr. What is the public holding amounting to?

10. RNRL stockholders lost more than they would imagine from RP merger. Stock price came tumbling down with this merger. What is the guarantee that RP's future would be similar?

At the end of the day, it is the individuals call to decide where his hard earned money goes. All the odds are against Reliance Power.

Silver plate

The author will be reachable at aahadqj@gmail.com.
Abdul Ahad
Research Analyst