RELIANCE POWER IPO – SUPER HIT!

 

 

Jan 15, 2008 01:37 pm

By SP Tulsian

A Shahrukh Khan movie guarantees a houseful opening in the first week of opening and an Anil Ambani IPO guarantees immediate full subscription on opening. That's the power of the name in India today!

The much awaited and huge IPO of Reliance Power was fully subscribed within a minute and covered 2.5 times within 25 minutes of its opening and in three hours time, it was 8 times subscribed. And this is not a small issue we are talking about, we are talking about a Rs.11,700 crore IPO, the biggest IPO ever on the Indian capital markets! The IPO received bids worth over Rs40,000 crore in the first five minutes of the book building process and all were at the upper price band of Rs.450 per share.

Well, this somehow does not come as a big surprise, the reaction amonsgt almost everbody is that this was bound to happen. Ask any man on the street, be a doctor, lawyer or even the mere dabbawallah on the cylce, panwallah on the corner of the street, almost everyone, who till yesterday had got nothing to do with the stock markets had collected monies , some have even taken on loans to invest in the IPO. The logic is – arrey Ambani ka IPO hai, paisa toh double hi hoga!

So given this kind of frenzy for the IPO, the coming days, till 18 ^th January will see new records being created. But mind you, even if this had been an IPO of Mukesh Ambani, it would not have mattered. For people, it is just the "Ambani" and the "Reliance" tag which matters. How many of those applying in the retail would have even bothered to find details of the Reliance Power IPO or gone through the project details ?

Retail investors have been offered a discount of Rs 20 per share, which implies their net cost of subscription will be Rs 430 per share, if the book gets discovered at Rs 450 per share. Retail investors and HNIs also have the option of making part payment of the application monies, wherein they will have to put in only Rs 115 per share upon application. The balance will be called upon, post the allotment of partly paid shares.

The retail investors limit is Rs.1 lakh, so we would typically see maximum retail investors applying for 225 shares, and they would pay Rs.25,875 on application. It is expected that this category would see subscription of 7-7.5 times. So this would mean that every retail investor would get about 30 shares. Presuming grey market premium of Rs.340 per share plus Rs.20 discount of Retail investor, this translates into a profit of about Rs.10,800.

In the High Networth Individual (HNI) category, those applying for one lakh shares will need to pay the same as retail investors, Rs.115 per share on application , in this case being Rs.115 lakhs on application. With 5% margin to be provided by the applicant, he puts in Rs.7 lakhs while Rs.108 lakhs is financed by an NBFC at 20% per annum interest. Assuming fund remains blocked for 16 days, the funding would have an interest burden of Rs.95,000 on Rs.108 lakhs having availed. If HNI category gets subscribed by about 200 times, there would be an allotment of 500 shares. Taking grey market premium of Rs.340 per share, it would give a profit of Rs.1,70,000, which results into a net gain of about Rs.75,000 (after deducting interest costs of Rs.95,000), on own investment of Rs.7 lakhs.

What one has to remember throughout all this is that currently, given the frenzy for the Reliance Power IPO, it is purely a trading appetite which is driving the IPO and not the investment appetite. There is no doubt that the HNI category would come to dump the shares in the market on listing. So, those who are getting into the share thinking people are clamoring for the stock purely on the basis of the fundamentals, will have to change the mindset and accept that for now, it is just momentum which will drive the stock, fundamentals will take some time to seep in, currently, it is nowhere in the picture.

Currently, in the grey market, the rates for the application premium has come down from Rs.12,000 to Rs.6,200. The premium per share has also come down from Rs.440 to Rs.340 . Based on this, it is assumed that the stock will get listed at around Rs.790-800 and in the next couple of days, post listing, the price is expected to soften by another Rs.100.

Irrespective of all these factors, power is the sector of this year. And Reliance Power is not the only stock in the sector, which is putting up huge power projects. In the next five years, by 2012, Reliance Power which currently has capacities of 7,000 MW, has a pipeline of 30,000 MW. NTPC currently has capacities of 27,000 MW and its pipeline upto 2012 is 23,000 MW. Tata Power has capacities of 3,000 MW and its pipeline is of 8,000 MW. Even the lesser known Neyville Lignite has currently got capacities of ,2500 MW and it plans to expand it to 15,000 MW by 2012.

What this means is that power is undoubtedly the sector to invest in but at the same time, Reliance Power is not the only stock, which is making good of this opportunity. There is no doubt that we are paying a premium for the name tag it carries and this is probably the goodwill in the markets which it will always continue to enjoy. Yet, keep your minds and eyes open for the other power sector stocks, which have been around much longer and are creating higher power capacities.

For now, make most of the opportunity which the IPO is presenting you with, afterall, making money is what the stock market is all about and nobody knows this better than the Ambani's!