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Indian IPOs
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Reliance Power IPO Analysis 15 January 2008 Source: www.keynoteindia.net
Reliance Power Ltd. IPO details: Price Band: Rs. 405 - 450 per share Issue open between: January 15 - 18, 2008 Book Running Lead Managers: Kotak, UBS, Enam, I-Sec and others To List on: NSE and BSE Market Cap post-listing: Rs. 1017 billion or $25.7 billion (based on the cap price) Highlights: Reliance Power Limited (Reliance Power), part of RADAG has been set up to develop, construct and operate power projects domestically and internationally. It aims to develop 13 power projects with an aggregated generation capacity of 28,200 MW. Reliance Power will have a diversified project portfolio in terms of geography, fuel mix and technology. Nine of the proposed thirteen projects are coal-fired or gas-based and two of those have fuel security; the rest are yet to be finalised. In our view, for such huge capacity, fuel linkage is of paramount importance (see status of projects on page 3). Long term PPAs for 8,560MW have been signed, constituting just 32% of the aggregated generating capacity. Of these, Sasan project (based on domestically procured coal) and Krishnapatnam project (based on imported coal) have been signed at a tariff of Rs1.19kw/h and 2.33kw/h per unit respectively, the differential attributable to the high cost of imported coal. A large number of PPAs are yet to be signed, reflecting some ambiguity on profitability. We believe equipment sourcing will be critical for Reliance Power being able to commission projects on schedule. Other key factors, apart from capital costs, are timely deliveries of equipment and maintenance costs. We believe the Group can draw synergies from the expertise of Reliance Energy in EPC in executing projects of Reliance Power. Our concerns include lack of fuel linkages except for 2 projects, coal prices and gas and equipment availability. Also in view of the gap between the aggregate project outlay of Rs1,12,129Cr and post-IPO net worth of 13,707Cr, we believe Reliance Power may have to opt for further equity dilution going forward, in order to maintain a manageable debt-equity ratio going forward. While the high promoter holding of around 90% post-listing is a positive, it may be viewed negatively from the point of view of minority shareholders, since the latter will enter the company @ Rs450 per share vis-?-vis promoters’ average cost of Rs16.92 per share. Given the long gestation period of projects, which are likely to get commissioned from FY10 onwards, we have considered non-earnings related valuation parameters. The valuation of the IPO in terms of price/book (7.4x FY08E) appears expensive vis-?-vis NTPC (2.8x) and Tata Power (4.5x). The issue appears expensive, also on the basis of asset valuation (estimated valuation of generating capacity) in FY13. It is only on the basis of FY17 estimates, that the issue looks attractive. However, we believe the aggression and track record of the promoter group in shareholder wealth creation in all its businesses including telecommunications, power distribution, financial services and entertainment is likely to have a positive rub-off effect on this IPO as well. |
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