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FINAL REPORT ON
"INITIAL PUBLIC OFFERINGS WITH SPECIAL
REFERENCE TO RELIANCE POWER"
2. Corporate Governance 7
5. Introduction 10
6. Objectives of study 21
7. Research Methodology 22
8. Data Interpretation 23
Reliance Power Limited is under the Anil Ambani Group and it is involved in the
business of developing large and medium size power projects. Reliance Power
Limited has plans developing around thirteen large and medium sized power
projects. The projects that are being developed by Reliance Power Limited are
located in southern India, western India, north- eastern India and northern India.
The total installed power generation capacity of all the thirteen power projects
would be around 28,200 MW.
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 finalized. In our view, for such
huge capacity, fuel linkage is of paramount importance
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-à-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-à-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.
Corporate Governance
Organizations, like individuals, depend for their survival, sustenance
and growth on the support and goodwill of the communities of which
they are an integral part, and must pay back this generosity in every
way they can...
This ethical standpoint, derived from the vision of our founder, lies at
the heart of the CSR philosophy of the Reliance – ADA Group.
As with all great pioneers, there is more than one unique way of
describing the true genius of Dhirubhai: The corporate visionary, the
unmatched strategist, the proud patriot, the leader of men, the
architect of India’s capital markets, the champion of shareholder
interest.
But the role Dhirubhai cherished most was perhaps that of India’s
greatest wealth creator. In one lifetime, he built, starting from the
proverbial scratch, India’s largest private sector enterprise.
Through out this amazing journey, Dhirubhai always kept the interests
of the ordinary shareholder uppermost in mind, in the process making
millionaires out of many of the initial investors in the Reliance stock,
and creating one of the world’s largest shareholder families.
CHAIRMAN'S PROFILE
Anil D. Ambani
Till recently, he also held the post of Vice Chairman and Managing
Director of Reliance Industries Limited (RIL), India’s largest private
sector enterprise.
In an IPO the issuer may obtain the assistance of an underwriting firm, which
helps it determine what type of security to issue (common or preferred), best
offering price and time to bring it to market.
An IPO can be a risky investment. For the individual investor, it is tough to predict
what the stock or shares will do on its initial day of trading and in the near future
since there is often little historical data with which to analyze the company. Also,
most IPOs are of companies going through a transitory growth period, and they
are therefore subject to additional uncertainty regarding their future value.
However, in order to make money, calculated risks need to be taken.
In addition, once a company is listed, it will be able to issue further shares via a
rights issue, thereby again providing itself with capital for expansion without
incurring any debt. This regular ability to raise large amounts of capital from the
general market, rather than having to seek and negotiate with individual
investors, is a key incentive for many companies seeking to list.
Procedure
IPOs generally involve one or more investment banks as "underwriters." The
company offering its shares, called the "issuer," enters a contract with a lead
underwriter to sell its shares to the public. The underwriter then approaches
investors with offers to sell these shares.
The sale (that is, the allocation and pricing) of shares in an IPO may take several
forms. Common methods include:
In the business of initial public offering, the underwriting contract is the contract
between the underwriter and the issuer of the common stock. The following types
of underwriting contracts are most common
In the firm commitment contract the underwriter guarantees the sale of the
issued stock at the agreed-upon price. For the issuer, it is the safest but the most
expensive type of the contracts, since the underwriter takes the risk of sale
In the best efforts contract the underwriter agrees to sell as many shares as
possible at the agreed-upon price.
Under the all-or-none contract the underwriter agrees either to sell the entire
offering or to cancel the deal.
Multinational IPOs may have as many as three syndicates to deal with differing
legal requirements in both the issuer's domestic market and other regions. For
example, an issuer based in the E.U. may be represented by the main selling
syndicate in its domestic market, Europe, in addition to separate syndicates or
selling groups for US/Canada and for Asia. Usually, the lead underwriter in the
main selling group is also the lead bank in the other selling groups.
Because of the wide array of legal requirements, IPO’s typically involve one or
more law firms with major practices in securities law, such as the Magic Circle
firms of London and the white shoe firms of New York City
Usually, the offering will include the issuance of new shares, intended to raise
new capital, as well the secondary sale of existing shares. However, certain
regulatory restrictions and restrictions imposed by the lead underwriter are often
placed on the sale of existing shares.
Public offerings are primarily sold to institutional investors, but some shares are
also allocated to the underwriters' retail investors. A broker selling shares of a
public offering to his clients is paid through a sales credit instead of a
commission. The client pays no commission to purchase the shares of a public
offering; the purchase price simply includes the built-in sales credit.
The issuer usually allows the underwriters an option to increase the size of the
offering by up to 15% under certain circumstance known as the green shoe or
over allotment option.
The first sale of stock by a private company to the public. IPO’s are often issued
by smaller, younger companies seeking the capital to expand, but can also be
done by large privately owned companies looking to become publicly traded.
In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it
determine what type of security to issue (common or preferred), the best offering
price and the time to bring it to market
Pricing
Historically, IPOs both globally and in the United States have been under priced.
The effect of "initial under pricing" an IPO is to generate additional interest in the
stock when it first becomes publicly traded. Through flipping, this can lead to
significant gains for investors who have been allocated shares of the IPO at the
offering price. However, under pricing an IPO results in "money left on the
table"—lost capital that could have been raised for the company had the stock
been offered at a higher price. One great example of all these factors at play was
seen with theglobe.com IPO which helped fuel the IPO mania of the late 90's
internet era. Underwritten by Bear Stearns on November 13, 1998 the stock had
been priced at $9 per share, and famously jumped 1000% at the opening of
trading all the way up to $97, before deflating and closing at $63 after large sell
offs from institutions flipping the stock . Although the company did rise about $30
million from the offering it is estimated that with the level of demand for the
offering and the volume of trading that took place the company might have left
upwards of $200 million on the table.
Investment banks, therefore, take many factors into consideration when pricing
an IPO, and attempt to reach an offering price that is low enough to stimulate
interest in the stock, but high enough to raise an adequate amount of capital for
the company. The process of determining an optimal price usually involves the
underwriters ("syndicate") arranging share purchase commitments from leading
institutional investors.
Issue price
A company that is planning an IPO appoints lead managers to help it decide on
an appropriate price at which the shares should be issued. There are two ways in
which the price of an IPO can be determined: either the company, with the help
of its lead managers, fixes a price or the price is arrived at through the process of
book building.
Note: Not all IPOs are eligible for delivery settlement through the DTC system,
which would then either require the physical delivery of the stock certificates to
the clearing agent bank's custodian, or a delivery versus payment (DVP)
arrangement with the selling group brokerage firm. This information is not
sufficient.
Introduction of IPO in context of Indian market
The Indian primary market has come a long way particularly in the last decade
after deregulation of the Indian economy in 1991-92. Both the primary and
secondary markets have had their fair share of reforms, structural cum policy
changes time to time. The most commendable being the dismantling of the
Controller of Capital Issues (CCI) and introduction of the free pricing mechanism.
This changed the whole facet of Initial Public
Recent Trends
In the last quarter of FY 2007-08, several large equity offerings, including those
from reputable business houses, have struggled to hit their targets. India's stock
markets have been volatile, reacting to fears of a widening global credit crunch
and fears of a U.S. recession. Let's have a glance of IPOs in the Indian primary
market during Jan-March, 2008.
IPOs
Period
Numbers Amount (Rs. In Crores)
January 2008 9 13,948
February 2008 4 1,893
March 2008 4 493
Fund raising by Indian companies has seen a sharp drop in the last quarter of
financial year 2007-08. This is evident from an analysis of data presented in the
above table.
-----------------------------------------------
Previous Existing
-----------------------------------------------
Reliance Power IPO has been issued by Reliance Power Limited. Reliance
Power IPO was issued on 15th January, 2008 and closed on 18th January, 2008.
Reliance Power Limited Company is planning to generate capital worth Rs. 11,
700 crores through the IPO. This makes it the largest IPO in the country as on
17th January, 2008. The price band of the equity shares of Reliance Power IPO
has been fixed at Rs. 405- 450 per equity share.
The total size of Reliance Power IPO is around 26 crores equity shares. Reliance
Power IPO will be listed on the National Stock Exchange (NSE) and also on the
Bombay Stock Exchange (BSE). The lead bankers of Reliance Power IPO are
Enam Securities, Kotak Mahindra Capital Co, ABN Amro Rothschild, ICICI
Securities, JP Morgan Chase & Co, UBS AG and
Book Running Lead Managers: Kotak, UBS, Enam, I-Sec and others
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.
Project going on all over India
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 finalized. In our view, for such
huge capacity, fuel linkage is of paramount importance (see status of projects on
Long term PPAs for 8,560MW have been signed, constituting just 32% of the
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-à-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-à-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.
Primary Objective
Understand the affected of Reliance Power IPO on
Indian share market
Secondary Objective
Factors responsible for the fall in price of Reliance
Power equity
Perception of a retail investor toward Reliance Power
before listing of IPO
RESEARCH METHODOLOGY
The research is exploratory Research. The data is collected from various sources like Internet,
News paper, Magazines, staff of Reliance money other broking Houses Personals .
TOOLS OF ANALYSIS
The data collected is shown through Graphs & pie chart
Soft wares used are SPSS & MS WORD
DATA COLLECTION
Source of data collection is Secondary
LIMITATIONS
Time Constraint
DATA INTERPRETATION
Performance of Reliance Power share price
From the above graph we can interpret that the share price of
reliance power is most of the time above the BES Sensex 30
index
The reliance power equity in other ways we can say is driving the
whole Indian equity market
Suggestion: BUY; Target price – Rs. 142
Open 138.00
High 141.90
Low 133.05
Last Price 135.05
The price of Reliance Power is currently moving in a trend (figure 1), but on a close look
it can be identified that the price is not following the trend line perfectly as lot of
deviations exist. One point to note is that the overall movement is upward i.e. the major
trend is Bullish with minor Bullish & Bearish trends. Any decision of whether to buy or
sell the stock cannot be made just by looking at this chart, as the trend is not pretty clear;
and thus other tools are used as described below.
As shown in figure 2, the ADX value of Reliance Power is high enough (=47.96),
therefore assuring the presence of the trending phase. Thus, the trend follower tools can
be used.
Fig. 3: MACD chart - Reliance Power
Currently, the MACD line (figure 3) is also above the EMA(9) line, therefore further
supporting the trend lines (of figure 1) that the Bullish phase is present. It should be noted
that the gap between the MACD and EMA(9) line is very small, and thus indicating that
Bulls are getting weak. Therefore, there are chances that Bears might get a lead in the
coming sessions.
Fig 4: Bollinger Bands - Reliance Power
In order to further confirm the presence of Bullish phase, Bollinger Bands are drawn with
SMA(20) as the base line (shown in figure 4). As can be seen, the price is moving close
to the upper band therefore approving the Bullish phase. But this also increases the
chances of a trend reversal in the coming sessions. Trend might reverse if the price goes
below the SMA(20) line and is not able to cross it again; thus care has to be taken after
investing.
It is advised to the readers to buy the stock with a target price of Rs. 142. It should be
kept in mind that the current trend is already weakening; therefore care should be taken
after investing.
OBSEVRATION & FINDINGS
Its found that the common man have faith in Reliance but the
situation were hostile
This faith is not ambiguous because it is based on Reliance’s past
performance of its equity funds like Reliance vision , diversified
power sector , natural gas & growth funds which are prevailing in
market from past 10 to 12 years & doing well in market
Books
Magazines
Business Week
Business World
Business today
Websites
www.relianceinsider.com
www.reliancemoney.com
www.moneycontrol.com
www.reliancepower.com
ANNEXURE