Missed Opportunity

reliance-power

Reliance Power Limited is part of the Reliance Anil Dhirubhai Ambani Group. It was established to develop, construct and operate Power projects in the Indian and the international markets. Reliance Energy Limited, an Indian private sector power utility company, and the Anil Dhirubhai Ambani Group promote Reliance Power.The company was incorporated in January 1995 as Bawana Power private limited and changed its name to Reliance Delhi Power Private Limited in Feb 1995. It’s name was changed to Reliance Energy Generation Limited in March 2004 and finally to Reliance Power Limited in July 2007.( Ref: Reliance Power Limited: Private Company Information. Business Week. Retrieved 16 Jan 2008 and Wikipedia)On 15 Jan 2008, the company attracted $27.5 billion of bids on the first day of its Initial Public Offering, equivalent to 10.5 times the stock on offer, thereby creating a history in India’s IPO record. The upper cut-off price for the bid was Rs. 450. the proposed IPO was to fund the development of its six power projects across the country whose completion dates are scheduled from December 2009 to March 2014. A media report suggested that, if the company’s stock price were to cross Rs. 650-700, Anil Ambani would go past L. N. Mittal to become the richest Indian. ” It is a reflection of world community in the future of India…Investors seem to be confident in the future on Indian economy”, P. Chidambaram, then the Finance Minister told the Media about the IPO( PTI 16 Jan 2008) Reliance Power debuted on the stock markets on 11 Feb 2008. However, the markets were still reeling after the Jan 2008 stock market Volatility, and concerns over speculation that the issue was overpriced sent the stock plummeting soon after its listing. At the end of the day, the stock traded at a value that was 17% lower than its issue price of 450. ( historical Data received from BSE and NSE) Investors who were betting on the stock reaching 1.5 or even twice its issue price lost a fortune in the process. On the 25 Feb 2008, in an effort to mitigate investor losses and maintaining the faith on the company, Reliance Power decided to issue 3 bonus shares for every 5 shares held.(Data received from BSE and NSE) This IPO gets 4/5 grades which means fundamentals are “ABOVE THAN AVERAGE”(Information received from CRISIL). so what went wrong? Lets see from the Behavioral and Accounting Perspective.

IPO got fully subscribed in the very first minute of its opening. (how it is possible?) with $27.5 billion of bids on the very first day, which was equivalent to 10.5 times the stock on offer. But the IPO was neither floated to augment any infrastructure of the company nor to expand the company’s presence in its sector. The money was to be used for funding the development of its 6 power project from scratch. Means the company is supposed to start itself with the help of this IPO. It was not exist in reality. And for this, people borrowed from various sources with hope that they will make money in this IPO. Some of them sold their successful investments for filling the money. The share listed on exchanges when bearish phase of the markets had just started.( in Jan 2008 Global Financial Crisis was there). Plus there are many other forces working. All because of that the stock was failed to touch even 300 mark. Highest price of this share is Rs. 270/share. so even if anybody sold on this level, he losses his 450-270= 180 per share or 40%. interestingly Mr. Warren Buffet, oracle of Omaha, says right about all this He once Said, “When you Combine Ignorance and Leverage( Borrowed money, the consequences can get Interesting” In this context, Ignorance is that Nobody realise that this company will not received its first Rupee after 5 year of IPO. Borrowed money is peoples put their life’s savings to invest in the IPO & some idiots took loans.

Accounting Perspective there are many Ratio with which you find out the value of any company. One of them is PRICE TO SALE Ratio (P/s). This Ratio is useful when the company is not profitable, but revenues are there on Profit and Loss statement. The formula is simple, find out total market cap of company, by multiplying numbers of shares with current market price of one share. This information is easily available with Stock Exchanges. Then Divide it with companies total revenue in last 12 months. In this case, as company is new, we will take Future expected revenue. The ratio shows how much the value of every Rupee is important from investors. This Ratio also Show the risk related with company’s current market price. A low price-to-sales ratio is one of the most potent combinations of investment criteria. Low P/S can indicate unrecognised value potential and High P/S indicate full recognition of value potential. FOR RELIANCE POWER THE RATIO WAS INFINITE. IT MEANS THE COMPANY IS SELLING ITS SHARES WITH ASSUMPTION OF HIGH GROWTH AND ON PRICES NOT TODAY’S. whatever It introduce me with the World of Finance.

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About Ashutosh Tilak

Tracking Indian Capital Market since 2010. Finance Student, On this blog I am writing about finance and Investing. You can contact me analystashu@gmail.com or @androidashu & @InsideFinanc on twitter