Mumbai: A stampede over India’s biggest ever share offer—for quick profits as well as to buy into a soaring stock market and a booming economy—saw the $3 billion (Rs11,790 crore) initial public offering of Reliance Power Ltd sell out within a minute.
By the end of Tuesday, the opening day of a four-day offer, the shares were subscribed 10.64 times, receiving applications worth Rs1.09 trillion, said investment bankers.
Most of the bids were received at the higher end of the price band of Rs405-450 a share, and led some to conclude that a 2.3% Tuesday drop in the Sensex, the benchmark index of the Bombay Stock Exchange, was related as investors sold shares to raise cash for their applications.
Institutional investors offered to buy 16.2 times the shares they were allocated while high net worth individuals bid for 6.7 times the shares that were set aside for them. Retail investors, who typically don’t bid on day one to avoid locking their money, bid for 99% of the shares up for grabs for them, said bankers.
The Reliance Power float, consisting of 260 million shares, has 30% reserved for retail investors and another 10% for non-institutional investors. Institutional investors can bid for the remaining 60%, which will be allocated on a proportionate basis.
While few observers doubt India’s need for power and infrastructure and the potential for new companies to become giants in meeting such needs, many analysts see Reliance Power as sharply overvalued, even for India where the Sensex has been soaring to new records for the past few years and was up 47.1% in 2007 alone.
The share sale will surpass India’s IPO record set by DLF Ltd, which raised Rs9,625 crore in 2007.
“Even if considered on project DCF (discounted cash flow)-based valuation, the issue appears to be highly overvalued, considering the long gestation for the projects,” wrote Emkay Share and Stock Brokers Ltd in a note to clients on Tuesday. “We believe that there could be major execution risks associated with the 13 projects planned by Reliance Power.”
The firm is a subsidiary of Reliance Energy Ltd, which has said the money raised will fund power generation projects. Reliance Power is developing 13 medium and large power projects with a combined planned capacity of 28,200MW.
“We like the long-term story in the power sector and we are interested in Reliance Power,” said Mahesh Patil, who helps manage $800 million in stocks at Birla Sun Life Asset Management Co. in Mumbai. “Although the company’s valuations are a little on the higher side, its share sale is the first among many (power) generation companies. That’s a healthy trend.”
A Morgan Stanley report on Monday had downgraded Reliance Energy on grounds that the Reliance Power IPO is overvalued. “The key reason for the downgrade is the valuation of Reliance Power, which we value at $11.85 billion,” analysts Parag Gupta and Saumya Srivastav said. Reliance Energy had valued its generation business at $23 billion to $25 billion, the analysts said.
“The Reliance Power IPO, no doubt, is very expensive. Investors are putting in the application purely for listing gains,” says Hitesh Aggarwal of Mumbai-based Angel Broking Ltd’s equity research desk.
Indeed, in the grey market in Ahmedabad, which bets on listing gains on primary market offerings, Reliance Power shares were being priced at between Rs800 and Rs1,000 a share, said traders. According to www.greymarket.co.in, a website that claims to track such grey-market prices, shares of Reliance Power now command Rs360-370 premium over the offer price of Rs405-450.
Mint has no independent way to ascertain these prices, which can also be heavily influenced by speculators and, sometimes, by companies themselves looking to make their multi-day IPO offerings seem more attractive to investors.
A Reliance Power listing is quite likely to allow its billionaire chairman, Anil Ambani, to finally overtake his estranged older brother, Mukesh Ambani, head of Reliance Industries Ltd, in terms of personal wealth, based on paper holdings in their respective conglomerates.
Based on the higher end of the IPO price band, the younger Ambani’s wealth works out to Rs2.31 trillion, only marginally lower than that of Mukesh Ambani’s Rs2.36 trillion. Reliance Power only needs to list at a premium of 11.6% for the younger Ambani’s wealth to surge ahead that of Mukesh Ambani, for now the richest Indian. This, assuming the share prices of all other group companies remain the same. Some 99% of Mukesh Ambani’s wealth comes from the holding in Reliance Industries, which has a market capitalization of Rs4.6 trillion. The senior Ambani owns 51% in the company. For Anil Ambani, 46% of his wealth comes from the 66.75% holding in Reliance Communications Ltd, which is valued at Rs1.6 trillion.
Mint calculations ignore cross-holdings such as Anil Ambani’s indirect holding in Reliance Power through his ownership in Reliance Energy. This is because Reliance Energy’s valuation already discounts the holding in Reliance Power, so, if a value is assigned to the indirect stake held by the promoter, it would result in double counting.
The two brothers run companies that don’t necessarily compete with each other, but there has been an unstated rivalry of sorts, especially when it comes to calculating each other’s wealth, since their father’s Reliance empire was split between the two.
In Ahmedabad, long lines of investors were seen in several parts of the city, waiting to submit their application forms. Darshana Shah, a home maker, came with her husband Rakshit Shah and two children to apply for the IPO.
“We both are working and, today being a holiday, we ventured out as we do not want to get caught in the rush hour on the last day,” she said.
There is incentive, too, for investors to rush to subscribe on the first day as brokers were seen handing out Rs200 to each investor. Rathodbhai and Modibhai, two forms collection agents at Kamdhenu Complex, which houses brokerages as well as the Ahmedabad Stock Exchange, were seen handing over cash to investors.
“The lead managers and promoters of most of the IPOs give incentive to brokers and we normally pass on this incentive to our clients,” says Harshit Shah, a sub-broker with a large brokerage house.
For the first two days of the IPO, the incentive is Rs200. It goes down to Rs75-100 on the third day and many brokers in the city have decided not to accept any form on 18 January. The incentive is given to avoid a typical last-minute rush.
“I feel the valuation is just on the paper, but our Gujarati friends are caught in frenzy of making quick money,” said Rameshbhai Patel, a local investor. “Reliance Power is unlikely to make any money for at least four years.”
Ashwin Ramarathinam of Mint, Salil Panchal of AFP and M.C. Govardhana Rangan and Archana Chaudhary of Bloomberg contributed to this story.