Friends,
I have got this info from mail from google group, thought that I should share with u.........
Can u have a look at this also?
If the Indian stock markets 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!
I have got this info from mail from google group, thought that I should share with u.........
Can u have a look at this also?
If the Indian stock markets 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!
