Broking houses advise caution on Reliance Power issue

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Old 17-Jan-2008
Broking houses advise caution on Reliance Power issue

Never mix business with pleasure, goes the saying. And that is just what the broking fraternity did. Notwithstanding the bonhomie evident at the company’s brokers’ meet, brokerages appear to have dug their heels in, crying “caution” on the ongoing Reliance Power issue. A far cry from when ‘mere papa ka sapna,’ and every mention of the word ‘Reliance’ was met with applause.

The reports on REL Power come with a caveat, with one even recommending an “avoid”. The bottomline being “subscribe for listing gains”. Most brokerages have identified absence of operating history, implementation delays, long gestation period, fuel availability and expensive valuation as the key concerns.

So, even as Emkay has advised its clients to “subscribe for listing gains”, Religare said “investors can subscribe to the IPO purely on the promoter group’s track record and execution capabilities”. It is reasonable to assume gains on listing, it goes on to add. Indian Capital Markets has also advised its clients to subscribe to the issue only to cash in on listing gains. But that’s not all. Equitymaster has come out with an ‘avoid’ citing execution risks and expensive valuations as some of the many reasons.

According to Emkay, unavailability of fuel could be a simmering issue. “Most of the projects do not have coal linkages, while availability of gas is not yet certain,” it says. The brokerage is also of the view that implementation delays are one of the biggest risks for the company. “We recommend investors to subscribe with the objective of booking listing gains in this stock,” sums the report.

Incidentally, the market has already been abuzz with talk that most retail investors are leveraging to invest in the issue, only to exit on day one. If the grey market premium is anything to go by, then investors are certainly expecting the stock to list at around Rs 900 levels.

Indiabulls on its part believes the company may face difficulties in procuring the required coal supplies for a majority of the projects at commercially acceptable terms. “The group company, RNRL does not hold any rights to coal resources of its own, and is in fact, in litigation with respect to gas reserves of Reliance Industries. Such conditions, if they continue, can have an adverse impact on the operations and finances of the company,” it says. Indiabulls has recommended a ‘subscribe’ to the issue.

Valuation is yet another area of concern. “We are unable to accord any definite valuation to the company since it has no operational assets,” says Emkay. The brokerage adds that valuations are stretched based on an individual project-based DCF approach. Equitymaster believes that “other listed power generators are available at much attractive levels than REL Power (where there is no underlying business to calculate the valuations!)”.

The hype about REL Power reached a crescendo, with issue being fully subscribed within a minute, on day one. As per exchange data, the issue was subscribed more than 10 times on the first day.

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