Reliance Energy - the story

Via Unkown Source - Not our view, we don't subscribe to these views . Do your due diligence

Do you know-
One stock that has surprised almost every-one on street in terms of stock performance (no analyst could justify that on fundamental grounds !!!)
One company that has led to re-rating of utility valuations
One company with most flamboyant Chairman who never hesitates to paint rosy picture
One company that has miserably failed in past to deliver (investors paid premium valuations to this stock 4 years ago, but were let down)
One company who now plans the biggest corporate governance frauds (by floating the parallel company in same business to increase promoter shareholding)
One company that wants to be 30 GW over next 9 years, but don't know exactly how
One company (group) that believes they can get 10X price to book for their power plants today (while their first projects will begin construction soon !!!)

Well I am talking about RELE-Reliance Power here.

1. The stock performance took everyone for a big surprise and led to re-rating of all the utility stocks in India. The company today wanted to set up 30 GW capacity over next 9 years; let me remind you that the same company had promised to set up the largest single location gas power plant 4 years ago, while the main plant has not
been ordered yet. (It is easier for this stock lovers to say that gas didn't come through, so is it Reliance Energy's fault).. Well here is a question I want to ask, when investors pay premium valuations, they assume there is almost ZERO risk in project. And this company failed to live upto the investor expectations.

2. This company is doing the same mistake once again - while they have been announcing new capacities left - right - centre; do they now have fuel tie-ups for all their projects. (I believe they don't have fuel supply surety for more than 1-2 projects). Aren't they doing the same mistake again? Before you announce a project, a management is expected to do all sorts of due-diligence to make sure the project comes on time. (Unfortunately declaring projects can get you market-cap; why to bother about fuel linkages today.)

3. As far as Reliance Power is concerned, where is the need to float this company when Reliance Energy is there. If at all Reliance Energy wants all power projects should come in one SPV; why is Reliance Energy not having 100% stake in this SPV. WHY ANIL AMBANI OWNS 50% of Reliance Power and just 50% stake is given to RELIANCE
ENERGY. ANIL AMBANI has very smartly increased his share in the growing power capacity of Reliance Energy to 75% (50% directly and 50% through his holding in Reliance Energy, which holds 50% of Reliance Power), by just paying US$ 125 mn. And now wants US$ 25-30 bn for Reliance Power.

4. Promoter contribution to Reliance Power is US$ 250 million for 100% stake. They want to offload 10% stake for US$ 2.5 bn (this would lead to biggest investment appreciation, 100 times) in a span of 5 months of formation of Reliance Power). With promoters contribution a capacity of just about 1000 MW can be set-up. Imagine the situation
- entire risk of projects is on minority share holders (after listing of Reliance Power IPO, the money that comes in would be used as equity contribution for upcoming projects); and ANIL would create personal wealth of US$ 17 - 20bn (Direct and indirect stake on Anil post listing would be ~ 67.5% in Reliance power).

5. If promoters are really serious about their business, they should have atleast contributed full equity for first 8-10 GW, commissioned these projects and then come to markets. With the small promoter contribution of US$ 125 mn, if they want to set up 25-30 GW, it is quite clear that entire risk is being shifted to those who contribute larger sum (which is going to be minority share holders post listing; as I heard it that 10% stake would be offloaded at US$
2.5 bn). Are you ready to put your money to face all the entire execution risk connected to projects and just to make ANIL richer. Well I won't.

I believe a couple of broking houses would try to justify the RELE stock price (might do NAV for its power projects that he plans to), might revise their target price upwards factoring in US$ 25 bn or US$ 30 bn value of Reliance Power etc, just because they can't afford to lose the IB deal from Anil Ambani group..

What should an independent analyst do???

(Independent analyst may not be able to say BUY on the stock on fundamental grounds; may not be able to say SELL as-well because of momentum in the stock. But can very well release a note saying we decide to drop coverage on this stock because I simply don't understand this company. It would be a nice way to say we don't subscribe to what's going on in Reliance Energy and Reliance Power. Believe me lot of level headed fund managers would appreciate it. In
London people liked our view.)

Or else let us just do a IB deals for them and earn big brokerage out
of it rather than just give trading calls on this stock

Stock is hitting lifetime highs as we are reading this................................