Reliance Power Bonus Still Yields No Value

I've changed this post in accordance with extremely recent news that the bonus is likely to be 1:3 or 1:5. I moved the P/E down to 14 from 15, and readjusted share prices. Slightly higher rate of return, but the net effect remains the same.

Amit commented in my last RPOWER post:

You are ignoring the fact that of the total market cap, investors will hold 19% instead of 10%. This amounts to adjusting the issue price downwards without explicitly saying so. the market performance has actually forced them to part with a larger slice at the same cash inflow.
Firstly I must say I agree with Amit that the promoters are letting go of some stake. But having said that, let's look at the math.

They currently have 226 crore shares, with 22.8 cr. shares held by the public. They have about 12,000 cr. of cash (10,000 from the IPO, and 2000 from the promoters) That's worth about Rs. 53 per share.

Now if they issue 1 bonus share for every three held, to only the public, that's another 7.6 cr. shares. So they will have around 234 cr. share. The cash they have is now worth about Rs. 51.2 per share.

Their prospects - let's say they were to make Rs. 15,000 cr. in 2015. (NTPC, which has the same capacity as RPOWER will have in 2016, makes 7000 cr. so let's give it a good double of that) That's an EPS of Rs. 64 per share. Take a 14 P/E: That's about Rs. 900 per share. From Rs. 400 today, that's a gain of Rs. 500 in 7 years. But for 400 shares today you should get the 1:3 bonus, effectively a price of Rs. 300 per share. Gains then are Rs. 600 per share.

On a percentage basis, this is a 17% return, compounded and annualised.

And that is at DOUBLE the profit of NTPC today (with the same capacity) and assuming no further dilution. (Promoters have the right to buy 10% more capital based on warrants, which, looking at promoters recently, is bound to happen)

So you are getting, in an optimistic scenario, a 17% annualised return. This is still quite optimistic and does not sound like great value to me. In comparison, buying NTPC which will have some three times RPOWER's capacity may be better, because at similar P/E you will get five times the return.

Tough scenario: 10 P/E, 10,000 cr. profit in 2015. Market price then: Rs. 420 per share after 7 years. 5% return.

There are other methods of valuation - a value based on replacement cost per megawatt etc. On these parameters, Reliance Power's 2015 valuation is just a little higher than today's rates (around Rs. 430).

Let's say, someone just sold you a Maruti Swift saying it was a Mercedes, and you paid 25 lakhs. Now they gave you back 5 lakhs. Does that make happier? You still paid 20 lakhs for a Maruti Swift, no?

But look at the momentum. Stock's up at 416 today, 8%. They say that when you take drugs, you first get the euphoria and then the big depressions. This market is just like a drug - there's a downside and we may know it, but as long as we keep getting shots, we're euphoric.

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