Reliance Power Ltd-Banking On SPVs?
Apart from a reasonably successful IPO of Reliance Power and the Bonus issue that has ensued, there still remain a number of questions about the viability and future of this entity.
-First, Reliance Power has been promoted by Reliance Energy and ADA group entities with a seed capital.
-Reliance Power has subsequently raised close to Rs 11,000 crore and got itself listed.
-Projects announced comprise a mammoth 28000 MW of generating capacity, which would come into being in stages by 2012.
-These projects in all 14 of them will cost not Rs 11000 crore as raised by the IPO but involve an outlay of roughly Rs 120,000 crore.
-Thus Reliance Power needs another Rs 110,000 crore to put these projects into existence...this is notwithstanding the amount that will need to be spent on building up the Power Grid, Transmission lines, Distribution networks and Coal and Gas units to provide fuel to these plants.
-Auxiliary Equipment industry which includes ABB, Siemens, Bharat Bijlee, Crompton Greaves, Thermax, Bhel, Jyoti Structure and KEC International collectively has a smaller annual turnover than is required to support fixed investment needed by Reliance Power.
-Most probably even these 12 or 14 projects that Reliance Power intends to set up will come under Special Purpose Vehicles, with seed capital from Reliance Power and all these SPVs will either be listed in India or overseas.
-If this is the way going forth, the investors of Reliance Power just like those of Reliance Energy will part and not full owners of the 28000 MW capacity proposed to be put up by Reliance Power.
-Accordingly returns for Reliance Power will be negligible and will not support the huge Equity base, this is especially so as most UMPP projects have been allotted at very low power production bids of Rs 2.25 per unit.
-Unlike merchant power producers that sell surplus power to the grid and need smaller supply linkages, Reliance Power will be subject to overall price fixing based upon Return on Capital Employed fixed by the Power regulators.
-The Reliance Power stock going forth will be valued on the SOTP method just like so many other infra stocks like GVK, GMR and JP and will not receive or deserve a higher valuation.
-Infact pending project execution, the Reliance Power stock could sink much lower from the current levels of Rs 320..especially when execution delays and mine linkages seem impossible to manage.
A brief note from B&K on the Reliance Power IPO is appended-this investors would note was written before the IPO hit the markets in late January 2008.
The DRHP discloses details of 7000MW of projects requiring Rs 61.5mn which is proposed to be utilised from the issue proceeds.
Details from DRHP:
- Total Equity Shares Issued: 1300mn
- Issued to promoters: 160mn
- Issued to public: 1140mn
- Post issue No. of Shares: 11300mn
- Equity Dilution: 11.5%
- Post Issue Holding of Reliance Energy 45%
Project details:
- RPL has disclosed details of ~7000MW of projects for which the issue proceeds are expected to be used.
- Five other projects cumulating to ~13200MW are also on the anvil, but still in the planning stage (or contingent on gas supplies).
- 10,280 MW of the total 20,160MW (51%) is dependent on the resolution of gas pricing issue which is currently subjudice.
| Projects For which IPO proceeds are proposed to be used | MW | Status | Issue Proceeds Utilisation (Rs mn) |
| Rosa (Coal) - Phase I & II (600*2) | 1,200 | Phase-I (600MW) under construction, clearances for Phase II awaited | 9,289 |
| Sasan UMPP (Captive Coal Mines) | 3,960 | All clearances acquired, construction to commence soon, funds being arranged | 36,301 |
| Shahapur (Imported Coal) | 1,200 | Pending: Land acquisition, environmental clearance, imported coal linkages | 9,067 |
| Urthing Sobha - Hydro (at 80% equity stake in 400MW) | 320 | Expected only by FY14 | 4,104 |
| Butibori (Coal) | 300 | Application for coal allocation submitted to Ministry of Coal | 2,722 |
| Total | 6,980 | Total | 61,483 |
Source: Reliance Power Ltd. DRHP, B&K Research
- Capital required for 6,980MW based on Rs 44mn/MW = Rs 307,120mn
- Equity required for 6,980MW based on 80:20 Debt: Equity = Rs 61,424mn
- Thus the company plans to raise 100% of equity requirement of the capex through the IPO by diluting just 11.5% equity.
| Other Projects on the Anvil | MW | Status |
| Shahapur (Gas) | 2,800 | Gas supply under litigation |
| Dadri (Gas) | 7,480 |
|
| Siyom (Hydro) | 1,000 | Currently in planning phase |
| Tato II (Hydro) | 700 | |
| Kalai II (Hydro) | 1,200 | |
| MP Power (Sasan II) | 3,960 | Land to be acquired & environmental clearances pending. Coal is available from mines allocated for Sasan UMPP |
| Total | 13180 | |
Source: Reliance Power Ltd. DRHP, B&K Research
Thus the expected FY09 P/BV of Reliance Energy (adding Reliance Power's value + value of existing business) works out to 3.5x which is higher than its peers even at the base case.
As the IPO amount raised is increased the valuations appear even more stretched.
Thus, we would advice caution as not only are the valuations stretched but the execution risk of the entire capex needs to be factored.
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