Candor anyone?

Yesterday we had a so-called “all hands meet”. There were people from the client side, and the honchos of the particular account tried to make a good show, despite all their gaucherie. but when it came to the so called human capital, they were asked to be present only to display the interest and dedication for the client and the local management. The usual presentations were followed by rounds of Q&A session…but no one tried to speak! I tried my hand at some of the so called future prospects, but it appears that my pointed questions were too blunt for their digestion. Then what is the objective of participation? Nothing but a facade of zeal.

Two days back someone told me about a meeting that was supposed to cushion the layoff blow; when rumors were prime that some shakeout was on the cards. But candid questions on the fairness of the selection were stifled at the root. Not a very nice thing to do: but so it happens.

Call it a cultural effect or a fear of getting reprimanded, I find this feature exemplary of lack of candor. Currently I am reading Jack Welch’s book on Winning, and he identifies lack of candor a serious impediment in the growth of any organization. Unfortunately the lack of candor is strongly celebrated in the environment where I am posted. There is always a majority speaking behind the backs, but are unable to put up in front of the bosses.

Why does the majority prefer keeping mum? Because that’s what has been taught to us since childhood. We should not call someone ugly, or fat or ineffective or … (include any negative word). We should be nice to others so that they can be nice to us. That’s quite a deal! It might help in the social set up, but definitely not in the corporate world, where your every action is accounted for.

It happens in big organizations, it happens where there is a legacy. But can it be changed? A difficult job, but a change agent can do it, if he/she gets a good deal of support. Unfortunately, those on the top do not like to hear what the junta has to say, so it can be a tough nut to crack!

volatile times

The stock market is being, and has been viewed akin to gambling. There are those who like to take risks: short term traders, traders in the F&O segment et al looking for a killing when they presume they can predict the trend. What they forget is to keep their personal downsides in control, or hell will break lose.

The stock market is a gamble to those who are lured by the growing numbers (the indexes, not the corporate results). Technical analysts tend to outperform the fundamentalists (if one would like to call them). But going by the tenet of Warren Buffet, looking for long term investments that have intrinsic value (and not value derived from the crazy bull run) gives the foundation to the stock.

It hardly makes sense to buy when the stock is on a peak, just as it is beyond commonsense to buy a depreciable item when it is expensive. But we humans, steered by greed and fear (both of which are vices as per the bible) lose all our common sense when it comes to making money.

I know there would be people around me who would say "I knew that, so I don't like to dabble in the stock market". Stock market is not necessarily bad; ideally it should reflect the performance of the companies. When it does not (remember the rising price earning multiples), the disaster is about to happen.

The largest IPO in the history of corporate India saw just too many takers; for they were driven not be logic or fundamentals (there isn't much to speak of), but by the fact that others are buying, so listing gains are as sure as the long term India economy. But they forget that when too many people are looking in the same direction, it can spell trouble. Yesterday, I came across a nice article that compared the unjustified valuation of Reliance Power with its competitors: NTPC and Tata Power. Its there in my previous entry.

In conclusion, I would say that invest in companies are out of favor in the market (contrarian approach), but have strong fundamentals. Trust the performance of the company, not the scrip.

RELIANCE POWER IPO ANALYSIS.

Got the following message from Tips4Trade. Interesting

---------- Forwarded message ----------
From: Tips4 Trade < tips4trade@gmail.com>
Date: Jan 22, 2008 11:45 PM
Subject: RELIANCE POWER IPO ANALYSIS.
To: Tips4Trade <Tips4Trade@googlegroups.com>

Now for all who have invested in the i PO... something to read !
Reliance Power Limited IPO

Opens: 15th January 2008.
Closes: 18th January 2008.

Price Band: Rs 405 to Rs 450.
Price Band for Retail Investors: Rs 385 to Rs 430. (Rs 20 discount).

Number of shares offered to public: 22,80,00,000 (22.8 crore).
+ Number of shares to be subscribed by promoters: 3,20,00,000 (3.2 crore).

Total new shares issued (sum of above two) = (26 crore)

Number of shares for retail investors: 6,84,00000. (6.84 crore).

Issue size (public) = (22.8 - 6.84) X 450 + (6.84 X 430) = 7182 +2941.2

= Rs 10123.2 crore.

Number of shares outstanding pre-IPO: 200 crore.
Number of shares outstanding post-IPO: 226 crore.

=======================================

Retail Investors and NII can apply with Rs 115 margin per share. (The details of this have already been discussed in earlier posts).

Maximum application possible in retail category = 225 shares.

=======================================

Already, a lot has been discussed about Reliance Power and its business (which will be there a few years from now).

This is an extremely rare case where SEBI has allowed a company with almost 0 revenues, to raise money via an IPO.

If this was an IPO by some smaller group, it would have been 100% rejected by SEBI for having no business.

=======================================

Business:

The company claims that it will be developing power generation projects of 28200 MW over the next decade.

According to the IPO RHP, some of the projects that it will be developing are:

Rosa-I (to be commissioned in March 2010) - 600 MW - Coal based.
Butibori (to be commissioned in June 2010) - 300 MW - Coal based.
Rosa-II (to be commissioned in September 2010) - 600 MW - Coal based.
Shahpur Gas (to be commissioned in March 2011) - 2800 MW - Gas based.
Shahpur Coal (to be commissioned in December 2011) - 1200 MW - Coal based.
Dadri (to be commissioned in March 2013) - 7480 MW - Gas based.
Krishnapatnam (to be commissioned in September 2013) - 4000 MW - Coal based.
Urthing Sobla (to be commissioned in March 2014) - 400 MW - Hydropower based.
Tato II (to be commissioned in March 2014) - 700 MW - Hydropower based.
MP Power (to be commissioned in July 2014) - 3960 MW - Coal based.
Siyom (to be commissioned in March 2015) - 1000 MW - Hydropower based.
Kalai II (to be commissioned in March 2016) - 1200 MW - Hydropower based.
Sasan (to be commissioned in April 2016) - 3960 MW - Coal based.

If

everything goes as planned, capacity of Reliance Power at end of each year till 2016 will be:

2008: 0 MW.
2009: 0 MW.
2010: 1500 MW.
2011: 5500 MW.
2012: 5500 MW.
2013: 16980 MW.
2014: 22040 MW.
2015: 23040 MW.
2016: 28200 MW.

=======================================

Other Similar Companies:

I can think of two companies in the power generation sector that Reliance Power can be compared with:

NTPC and Tata Power.

NTPC has current capacity of 28000 MW and has target to achieve 66000 MW by 2017. ( See this thread on NTPC).

Tata Power has current capacity of 2300 MW.
It will be adding 10000 MW of capacity more by 2012. Thus, it will have a capacity of around 12300 MW by 2012 end.
The additions will all be coal based.
-Mundra Ultra Mega Power Project -4000 MW.
-Power plants in Maharastra - 3000 MW.
-Captive power plants for Tata Steel - 2000 MW
-Maithon Power Plant at Jharkhand - 1000 MW.

Tata Power also has other smaller business and also wants to enter shipping and logistics. Besides that Tata Power has investments valued at Rs 400+ per share of Tata Power. This works out to be Rs 10000 crore.
Around 2012 - 2013, both Tata Power is expected to have similar capacity as Reliance Power.

The interesting thing is at current price of Rs 1457, Tata Power is valued at just Rs 30000 crore. Remove Rs 10000 crore of investments and you can have it only for Rs 20000 crore.

At Rs 900, Reliance Power will have market value of 200000 crores....6.67 times that of Tata Power. .

========================================

Financials:

With 2300 MW capacity, Tata Power made standalone profit of Rs 700 crore in FY 2007.

With 28000 MW capacity, NTPC made standalone profit of Rs 6900 crore in FY 2007.

Lets assume Reliance Power turns out to be much more efficient than these two companies. Add to that increased power rates.

With 28200 capacity, assume Reliance Power makes Rs 15000 crore of net profit in 2016-2017. Power companies are considered as utilities and worldwide trade at 10-15 times their earnings.

Lets assume 15 times ratio for Reliance Power in 2016.

What will be its market value?

15000 X 15 = Rs 225000 crore or Rs 995 per share.

This is an optimistic view:
-there will be no further equity dilution till 2016.
-assuming nearly twice as much efficiency as NTPC.
-that all projects will be completed before 2016 end.
-the company would have paid back all debt by then and interest costs would be in similar range as NTPC.

(NTPC already has established 28000 MW capacity and comparatively much lesser interest costs. (NTPC's P&L account states Rs 1800 interest cost for FY 2007).

So what about the debt?

The RHP mentions estimated cost of six projects Rosa I, Rosa II, Butibori, Sasan, Shahpur Coal, Urthing Sobla as Rs 30000 crore+.

Analysts estimate that Reliance Power will need Rs 70000 crore of debt to finance its projects which are estimated to cost 100000 crore+.

Rs 70000 crore of debt is not going to come at 2% interest rate. Even a 6% interest would mean an annual interest cost of Rs 4200 crore. Only in 2013, the company's capacity will cross 10000 MW. Thus, I do not expect any major debt repayment before 2014. If things don't go as planned, the debt burden will make a mockery of the balance sheet.

With Rs 12000 crore raised in equity and Rs 70000 crore of debt, these whole business will become a high-risk venture.

Any unforeseen delay/derailment of plans may create major problems for this company.

========================================

Reliance Power - The Overlooked Fact:

Is Reliance Power just "Reliance Power"?

No.

It is actually "Reliance Power Limited" - a limited company.

 So what does this mean for Reliance Power Limited?

It means if in the rare case, the calculations of the management go wrong and the company somehow goes to insolvency, none of the shareholders will lose anything expect the value of the shares.

If you are a share holder of Reliance Power and it goes into insolvency (unable to pay back debts), what do you stand to lose?

Rs 430 per share.

Lot of money....right?

What does Anil Ambani's AAA Project or REL lose?

Both of them had got their 45% (post-IPO) stake for Rs 1000 crore each. Plus they will each subscribe to 1.6 crore shares each at Rs 450 in the IPO......which works out to be Rs 720 crore.

Thus, AAA Project will be getting 101.6 crore shares of Reliance Power for Rs 1720 crore and REL will be getting 101.6 crore shares of Reliance Power for Rs 1720 crore.

Little less than Rs 17 per share.

This is what both the promoters are risking in this project.... Rs 17 per share ; while investors will be risking Rs 450 per share.

This is exactly the reason why Reliance Power was created.

First, by contributing just Rs 1720 crore each to Reliance Power, the promoters have shifted all risk to investors.

Second, by getting 45% stake (in REL's projects) to AAA Project for a mere Rs 1000 crore, AAA Projects (and Anil Ambani) have created wealth out of thin air.

Anil Ambani's Rs 1000 crore investment will be worth Rs 100000 crore when Reliance Power lists at Rs 900.

If the gamble works, the promoters (holding 90% stake in Reliance Power) will be worth billions of dollars.

If the gamble doesn't work, the promoters will lose Rs 1720 crore each and investors will lose Rs 10000+ crore which they will be paying for a mere 10% stake in Reliance Power.

What a way to create wealth...!!!....I don't have words to describe the brilliance of Anil Ambani's plans... .

========================================

So what will I do with this IPO?

Firstly, I will subscribe to it,

not because I think it is a good company or is offering great value at Rs 430,

but because I am in this market to make money.

The markets are in such a frenzy, nobody bothers about valuations anymore........not even QIB and other institutional investors.

Everyone knows that Reliance Power will list at a premium and thus everyone will apply....valuations can wait for some other day.... .

Everyone should wait till last day and apply for it. Just check the subscription levels by 11 AM on last day.
========================================

What will I do post-listing?

For bigger IPO's like Power Grid and Mundra Port, I have followed a sell-half-keep-half strategy.

Assuming listing at Rs 900, for Reliance Power, I will follow sell-all-keep-none strategy.

First, other companies are much cheaper.

Why should I keep a company valued at Rs 200000 crore -

when another company (with similar capacity by 2013) is available at Rs 30000 crore with much smaller debt burden and Rs 10000 crore worth of investments ...........referring to Tata Power.

If Reliance Power (at Rs 900) is available for Rs 200000 crore, why not buy NTPC for a similar price......Rs 225000 crore. NTPC plans to have a capacity of 66000 MW in 2017, while Reliance Power will have 28200 MW capacity in 2016.

Second, the risk is higher than other existing companies.

With marginally cash flows for next 5 years and Rs 70000+ crore of debt, the risk for Reliance Power is high. Tata Power and NTPC have existing cash flows to handle expansions....Reliance Power does not.

Third and the biggest factor is....the valuation of the company doesn't make much sense.

Why should Reliance Power be valued at Rs 200000 crore, when in highly optimistic scenario, it will not make more than Rs 15000 crore of profit in 2016 ? Even if it touches that figure of Rs 15000 crore, its market value in 2016 will not be much more than 225000-300000 crore. (if given a 15-20 times multiple).

A fixed deposit will make more money than that in 8 years.....and that too without any risk.

Also, I got the optimistic Rs 15000 crore figure by assuming two times margins as NTPC.

The fact is..... at least till 2014, Reliance Power will still be carrying most of its Rs 70000 crore debt and its interest costs will squeeze margins to a large extent.

========================================

Final verdict:

Apply.

I will be selling all shares at 9:55..........not even waiting for a better price.

If you want to try for a better price, hold at your own risk.

The level of insanity in the markets is at a high...

Value and risk mean nothing today..... price and profit are the keywords.

Who knows.....the stock may got to Rs 1100 or more.

========================================

Addendum:

Reliance Power may win more projects in the future.

However, it is unlikely that any new project that Reliance Power gets will be commissioned before 2012. Additional projects will also bring additional costs too.

It doesn't make much sense to consider future projects before they are actually won.

Also, Reliance Power is winning projects by offering very low rates - another factor that will decrease margins and increase risks for the company.

For example, in case of Krishnapatnam Ultra Mega Power Project, Reliance Power won with a bid of Rs 2.33 per unit.

L&T had bid Rs 2.69 per unit and Sterlite had bid Rs 4.19 per unit. Such aggressive pricing may backfire if costs rise due to some unexpected factors

--
Thanks
Tips4Trade Team
www.tips4trade.com

Reliance Power

What happens when faith defies logic? The situation can be nothing less than crazy. With global interest shooing away from the stable economies to emerging markets, it’s the liquidity that plays.

Reliance Power has been the biggest IPO in the history of corporate India with Rs 7.52 lakh crore being thown in for a Rs 11,700 crore offer. In fact, it has made a world record. BSE Sensex, the bellwether index of the Indian economy tanked 1713 points, while investors were keeping themselves cash ready for the investment.

So bullish is the sentiment for a company that has not even started its operations! In addition, it plans to further raise capital from institutional investors, diluting the stake. The offer opened at a price band of Rs 420 – 450, with retail investors being shown the opportunity to invest with the maximum allowable amount by just paying 25% of the value. Further, they had an offer of a discount of 20Rs per share, as icing on the cake.

The NDSL and CDSL saw some 10 lakh demat accounts being opened in 5 days, again an unprecedented event. The offer was oversubscribed some 20 times in the retail segment, and how many would get allotted is anybody’s guess.

Why this euphoria behind the POWERful offer? In the recent times, the group has come up with IPOs like Reliance Communications and Reliance Petro; the latter being under construction at the time of the issue. Both managed to draw investors like a swarm of bees; and suddenly everybody has an interest (read:stake) in Reliance. Fundamentally speaking, the valuation cannot be justified without the presence of existing operational assets. Upon listing, the volumes will push the price levels to 900 or even 1000. One cant even look at the PE levels, since the E part is 0. Such is the faith on Anil Ambani’s management; he is already the 3^rd richest Indian.

IPOs in the recent times have been popular only because of the listing gains. REPL has no different story. Analysts caution that the absence of any operating history does not justify the current valuation levels, and should be used primarily for making money on day 1.

Valuation is yet another area of concern. “We are unable to accord any definite valuation to the company since it has no operational assets,” says Emkay. The brokerage adds that valuations are stretched based on an individual project-based DCF approach. Equitymaster believes that “other listed power generators are available at much attractive levels than REL Power (where there is no underlying business to calculate the valuations!)”.

This week’s fall is expected to be made up upon the share allotment and listing. I haven’t invested myself, for I preferred making good use of the fall and investing in the blue chips at lower levels.

The poster boy has an excellent marketer. Using dabbawallas for sending IPO forms has been unheard of. I happened to see IPO forms being available outside Churchgate station in Mumbai, but this attempt to reach the masses is an attempt to arouse investor (or consumer) interest.

We are waiting for the listing..But the patriarch must be smiling up there.

The Nano is here

Tata’s small car Nano has raised too many voices and too many inquisitive glances. It was a truly ambitious project, and a prototype itself has taken all the media attention since the opening day of the auto expo; currently on at Pragati Maidan.

What amazed me is the extent to which it has been able to be on the top of the minds of the junta. Last weekend, we had been out to Taki, a tourist spot at the Bangladesh border; and a (mostly) rural area. My blue Wagon R caught the attention of the folk; not because of the color or the fact that it is new: because it resembles (!!) the Nano!! I was awestruck when I heard someone talking if this car was a nano (which automatically implies that they have never seen a Wagon R before, and probably would put the same question on every hatchback that comes their way). They had no idea that the Nano is still to reach the market, or the bookings are yet to start; or even that it is much smaller; or it comes only in white, yellow and red. Initially I was disappointed to hear the people comparing my Wagon R (which is about four times the price) with the 1 lakh Nano; but ultimately I was simply amused, to say the least.

Tata’s are known to show the way; they did set up the first private sector steel plants in the country when India was still under the British rule. The Indica was the first diesel hatchback; giving stiff competition to Maruti and Hyundai. Ratan Tata would retire at the top of his career; and he would surely be remembered in the years to come.

About the economics now: everyone is talking about the little Nano. Its too cute in looks as well as price. It is encouraging the Indian mass to get a four wheeler; but at what cost? Jagdish Khattar commented that this car has opened up a new segment. It definitely has, and a migration from two wheelers to four is expected soon; leaving bike companies in despair. Undoubtedly, Rajiv Bajaj has made a smart move to join the bandwagon with a sub $3000 car. Maruti is also expected to come up with innovations that will compensate for the expected shortfall of revenues from Alto and 800.

For an individual jumping into the foray of a 1 lakh car, what other factors does he need to look into?

One time costs: Rs 130,000 (including insurance and road tax)

Monthly cost:

Garage: Rs 1000 [Parking on the road is an alternative, but the volumes are surely going to make the metropolitan authorities disallow such nuisance. Noida already has this rule]
Fuel: Rs 1500 [600 km / month; 20 kmpl; Rs 50 / lit – Fuel prices are set to rise, thanks to $100 barrel]
Maintenance: Rs 500
Driver, strongly applicable in non self driving place like Kolkata: Rs 2500

Total: Rs 5500.

Do we expect everyone to be able to afford this? Seems unlikely.

The major concerns are infrastructure and environmental. Without an adequate infrastructure in place, it would get very difficult to sustain this system. Road tax and registration are sure to fill up coffers; but without a good initiative to utilize the money, we are planning for an urban nightmare.

Some people like me would stop using cars for work if there is a good public transportation system.

Thomas Friedman rightly said in his New York Times article that India must not blindly copy the developed world.

Only time will tell what will happen once the Nano is out in the market. But rest assured, it will surely bring in quite a lot of excitement not only in India, but also in the world where the Nano would be exported.