Technicals in the near-term do not favour Reliance Power stock; it needs to be supported on day one to absorb some of the supply which comes in and you could see attendant selling on the futures market too because of fundamental factors and people believing that it may be overvalued and they need to exploit the weakness.
On technicals of Reliance Power:
We have been talking about how HNIs would want to flip because they have not got 900 etc. and they would want to get out of those positions. But it is instructive to talk about the quantum of money which we are talking about. Instead of just aimlessly talking about who is going to sell and who is going to buy, just look at the allotment figures – who’s got what. Retail got Rs 3,000 crore, HNIs got Rs 1,000 crore and QIBs got about Rs 6,000 crore. So you were seeing some basic sets of numbers.
Assume that every HNI will want to flip on Day one, which I think is a reasonable assumption – Rs 1,000 crore of selling to come in on Day one. Retail got Rs 3,000 crore; 2/3rds of them would want to flip. Is that a reasonable assumption? I think so. I think there might be one guy in three who wants to own Reliance Power in the longer-term. But two out of three would have played for the pop; so Rs 2,000 crore retail, Rs 1,000 HNI potential selling on Reliance Power today.
On QIB, I have a less lofty view of the QIBs as great long-term institutional investors. But let us say half of them at least bought for the medium-term and did not get enough allotment. So half of them would want to flip and they got in for the flipping game to begin with; because they saw dream of Rs 900 and they wanted to play for that pop. So is that Rs 3,000 crore more of potential selling which had come from the QIB fraternity? That is Rs 3,000 crore plus Rs 2,000 crore plus Rs 1,000 crore; Rs 6,000 crore of potential selling, which could be stacked up.
Once you add those numbers, it is probably not such a huge amount of supply for the kind of stock and the kind of promoter that we are talking about to absorb. But Rs 6,000 crore of selling needs to be absorbed. I have no doubt that some institutional investors would want to buy as well because the bids were large and some of them probably for the longer-term, would want to own some more stocks because allotments were quite poor because of over-subscription. There could be some buying which comes in from some mutual fund houses as well which might soak up some of that supply.
So let us say that out of that Rs 6,000 crore of supply that we are talking about, Rs 2,000-3,000 crore is mopped up by some institutional quarters and the rest needs to be mopped up by somewhere else. I do not think it is such a tall order. So in the near-term, while there is going to be supply which comes in, I would hesitate to become too bearish from a technical point of view.
I know a lot of people are probably waiting to exploit the kind of weakness that they see. Because of the supply which comes in temporarily, there could be weakness. But I think it might be also dangerous to go whole hog shot on that stock this morning because you could be surprised and forced to cover up your positions. So yes, technicals in the near-term do not favour the stock; it needs to be supported on day one to absorb some of the supply which comes in and you could see attendant selling on the futures market too because of fundamental factors and people believing that it is maybe overvalued and they need to exploit the weakness.
So there could be some selling. But I think there could be enough support coming by way of the stock because one and a half billion dollars for this group is not such a large sum of money to either put in or to garner by way of support. I would just keep that at the back of my mind because it looks like everybody you speak to might be wanting to sell. But once you work the numbers, I think those numbers can be conjured up.
Next: On fundamentals of Reliance Power:
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The technicals are slightly more difficult to game because we do not know who is going to sell, who is going to buy. But if you just look at Reliance Power in isolation; not under who is going to buy, who is going to sell, who is going to support etc - just a clear look at fundamentals for what they are worth, I think the answer becomes quite easy because our guess is that if execution is faultless and things carry as planned, then they will probably do something like Rs 80 book value; they would arrive to Rs 80 book value, give or take a few rupees by FY13. We are talking five years forward out here.
By the time we get to FY16, everything is completely executed - you are talking about Rs 125 book value, give or take a few rupees faultless execution - even if you assume that the execution is faultless and you get to Rs 80 book value in the next five years in FY13 - I frankly cannot look beyond that five-year; at that Rs 80 book value, if the stock gets listed around that Rs 550-600 mark, you are talking about seven-times book already.
Seven-times five-year forward book, that to me, is completely staggering. It seems very expensive to me. You go to FY16 and say fiscal year 2016 - Rs 125 book at Rs 500, which is not quite Rs 900; we are still talking four times book and that is about five years forward.
Staggering valuations - which utility company in the world trades at seven times book, five years forward? I do not think there is a single one. Now you come to price earnings multiples. It looks even more mind-blowing. They might do Rs 20-25 earnings. If everything is smooth by FY13, you are paying 25 times for utility stock five years forward. I find that quite staggering too.
So what is fair value for a Reliance Power? It is not enough to say Rs 500 is overvalued. Just work with a ballpark number of Rs 300. At Rs 300, it would have a marketcap of something like Rs 68,000 crore - that would be 40%-42% of NTPC’s current marketcap. I think that is fair, the company does not have any power in the ground.
NTPC has the entire capacity that Reliance Power wants to put up over eight years functioning today, on ground today; not eight years forward. Give it 40% of that value today - what is wrong with that? At Rs 300, assuming Rs 80 of value, you are paying almost four times book.
So you are paying four times book value for potential five years forward. You are paying 40% of a company’s value, which has already got the capacity in ground, which you want to achieve over eight years and I think that is fair enough. So for my money, Rs 300 is fair value for Reliance Power, Rs 450 is expensive and overvalued; Rs 550 is certainly pushing it.
And just keep Reliance Energy on the back of your mind because that stock has been struggling to hold Rs 2000 for the last few days and I think if Reliance Power does not get off to a flier or hold a very smart listing above Rs 600, then I think you should see attendant pressure on Reliance Energy as a stock because a lot of that is sum-of-parts etc and that story might just get a little coloured.
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