A right royal abuse of power - Reliance Power IPO - By Udayan Mukherjee,

Thanks to : http://www.hindustantimes.com

The most awaited event of the Indian primary market calendar is here. Reliance Power may have priced its IPO in the Rs 415-450 band but the active grey market price is Rs 900. This gives Reliance Power a potential listing market capitalisation of Rs 2,00,000 crore. With zero installed capacity today, expected generation capacity of 6,000 megawatts by 2011 and 26,000 MW by 2016. NTPC, in itself a richly valued stock, has an installed capacity of 27,000 MW and commands a similar market cap. The market has simply taken an eight year leap and priced it in the Reliance Power stock today. I find that staggering.

A look at the ratios look even more mind numbing. This IPO money is being raised to execute about 7,000 MW of capacity. That should be done by 2012. That year, if all goes perfectly, Reliance Power will have revenues of Rs 7,700 crore, EPS of under Rs 8 and a book value of Rs 70. At the listing price of Rs 900, the stock would be trading at a 2012 price-earning ratio of 110, a price to book value ratio of 13 and a market cap to sales ratio of 26. These are four-year forward ratios, remember. The ratios moderate somewhat for 2016 but by then much further dilution would have happened to finance the additional capacity so the market cap would balloon substantially.

This is madness. While many explanations abound on how such valuations could be justified, this is so similar to the 100-plus PEs the market gave freely to information technology stocks back in 2000. While all of us know how that story finally ended, we should also remember how long that madness continued. The power madness, too, will end, sector tailwind notwithstanding, but it may continue longer than we think it can before fizzling out. While it lasts, the most expensive stock in the sector will become the valuation benchmark and will pull the others into the clouds. Just remember the old adage: those who forget history are doomed to repeat it.

(The writer is Executive Editor, CNBC-TV18)


Post a Comment

All comments are moderated. Please post no spam

Disclaimer & Privacy Policies

(c) Mrs. Ruby Christy. This site and contents are owned by Mrs. Ruby Christy;
Use of this website and/or services offered by us indicates your acceptance of our Disclaimer& Privacy Policies.

Information and opinions provided on this website (www.investchips.com) has been independently obtained from sources believed to be reliable. However, such information may include inaccuracies, errors or omissions. Investchips.com and its affiliates, information providers or content providers and R.John Christy and his Family shall have no liability to you or third parties for the accuracy, completeness, timeliness or correct sequencing of information available on this website or feeds, or for any decision made or action taken by you in reliance upon such information, or for the delay or interruption of such information. Investchips.com,its affiliates, information providers ,content providers and R. John Christy and his Family shall have no liability for investment decisions or other actions taken or made by you based on the information provided on this website. Any action you choose to take in the markets is totally your own responsibility. Investchips.com and R. John Christy and his Family will not be liable for any, direct or indirect, consequential or incidental damages or loss arising out of the use of this information. This information is neither an offer to sell nor solicitation to buy any of the securities mentioned herein. Opinions expressed by R. John Christy are his own and not of his past, present and future employers.
The DoubleClick DART cookie is used by Google in the ads served on this websites displaying AdSense for content ads. When users visit this website and either view or click on an ad, a cookie may be dropped on that end user's browser.
  • Google, as a third party vendor, uses cookies to serve ads on this site.
  • Google's use of the DART cookie enables it to serve ads to your users based on their visit to this site and other sites on the Internet.
  • Users may opt out of the use of the DART cookie by visiting the Google ad and content network privacy policy.
  • www.investchips.com never collects any personal information of visitors.