Reliance Power Ltd, which raised Rs 11,562 crore in its IPO in January last, has temporarily parked almost the entire money in mutual funds. The 2007-08 financial results declared by the company on Monday show that Rs 11,412.81 crore is invested in mutual funds. The company has not disclosed either the funds or the schemes where the money has been invested.Reliance capital benefits from Reliance Power's parking of funds, surely - they're just crossed an AUM of 100,000 cr. and this sorta helps, I guess.The IPO offer document says that the company “intends to invest the funds from the issue in interest bearing liquid instruments including deposits with banks and investments in mutual funds. These investments may include investments in mutual funds managed or financial products sold by one of our affiliates, RCL (Reliance Capital)”
The company has spent only Rs 25.83 crore as of March 31, 2008 in construction and development of its various projects.
The temporary parking of the IPO money in mutual funds has helped the company report a net profit of Rs 94.6 crore for 2007-08. Total income for year stands at Rs 132.8 crore, of which dividend income is Rs 112.7 crore.
And now, without using ANY money they can get around 900 to 1000 cr. in "dividend income" - nearly 9% of the collected money - as practically risk free money. If they don't spend a lot that indicates a huge part of it as profit - heck, they could grow revenues and profit 8 times (800% growth) without moving a finger!
Well, this makes no sense fundamentally of course, but things will change as we move on - surely they will deploy this money into projects and those should get you a much better profit than the risk-free return. Still, the share issuance is very large - nearly 236 cr. shares are out there, and some more with the bonus issue. So it's all going to be about how they churn out profit. At current prices of 400+, they need to make profits of some 10,000 cr. within five years to get a good return. That will be something to see.
Disclosure: No positions.
Reliance Power Bonus Still Yields No Value
Categories: Commentary, IPO, ReliancePower
Amit commented in my last RPOWER post:
Firstly I must say I agree with Amit that the promoters are letting go of some stake. But having said that, let's look at the math.They currently have 226 crore shares, with 22.8 cr. shares held by the public. They have about 12,000 cr. of cash (10,000 from the IPO, and 2000 from the promoters) That's worth about Rs. 53 per share.
Now if they issue 1 bonus share for every three held, to only the public, that's another 7.6 cr. shares. So they will have around 234 cr. share. The cash they have is now worth about Rs. 51.2 per share.
Their prospects - let's say they were to make Rs. 15,000 cr. in 2015. (NTPC, which has the same capacity as RPOWER will have in 2016, makes 7000 cr. so let's give it a good double of that) That's an EPS of Rs. 64 per share. Take a 14 P/E: That's about Rs. 900 per share. From Rs. 400 today, that's a gain of Rs. 500 in 7 years. But for 400 shares today you should get the 1:3 bonus, effectively a price of Rs. 300 per share. Gains then are Rs. 600 per share.
On a percentage basis, this is a 17% return, compounded and annualised.
And that is at DOUBLE the profit of NTPC today (with the same capacity) and assuming no further dilution. (Promoters have the right to buy 10% more capital based on warrants, which, looking at promoters recently, is bound to happen)
So you are getting, in an optimistic scenario, a 17% annualised return. This is still quite optimistic and does not sound like great value to me. In comparison, buying NTPC which will have some three times RPOWER's capacity may be better, because at similar P/E you will get five times the return.
Tough scenario: 10 P/E, 10,000 cr. profit in 2015. Market price then: Rs. 420 per share after 7 years. 5% return.
There are other methods of valuation - a value based on replacement cost per megawatt etc. On these parameters, Reliance Power's 2015 valuation is just a little higher than today's rates (around Rs. 430).
Let's say, someone just sold you a Maruti Swift saying it was a Mercedes, and you paid 25 lakhs. Now they gave you back 5 lakhs. Does that make happier? You still paid 20 lakhs for a Maruti Swift, no?
But look at the momentum. Stock's up at 416 today, 8%. They say that when you take drugs, you first get the euphoria and then the big depressions. This market is just like a drug - there's a downside and we may know it, but as long as we keep getting shots, we're euphoric.
Posted in Commentary, IPO, ReliancePower