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Reliance Power Bonus – Compensation or

Reward?
By SP Tulsian

We have analysed the expected bonus ratio by Reliance Power in our previous cover feature where it
was stated at 50% bonus. In reality, it came at 60% (3 bonus shares for every 5 shares held).

We infact, call it compensatory issue and not bonus issue, as issue has been made to bring down the
cost of investors, having acquired shares in IPO, in retail category, from Rs.430 to Rs.269 per share
and in non-retail category, from Rs.450 to Rs.281 per share.

How would the losses of those investors get re-couped and recovered, especially those who have sold
between 11th February to 15th February, which are about 8 crore shares, constituting about 35% of net
public offer?

The issue of free shares, also establishes a fact that issue was overpriced by about 60% and even this
issue has failed to take its share price to cross Rs.450 mark. This is after excluding interest cost of
Rs.125 per share, to the HNI Category, having applied in IPO.

The present equity of the company would rise from Rs.2,260 crores to Rs.2,396.80 crores. In order to
enable Reliance Energy Ltd (REL) to maintain its stake, in relative term, post bonus, Anil Ambani
would be offering about 6.14 crore shares from AAA Project Venture P. Ltd. (100% owned by Anil
Ambani) (AAA) to REL, free of cost. Due to this, absolute holding of REL would rise from 101.60 crore
share to 107.74 crore shares, keeping its stake at 44.96%, pre-bonus and post-bonus. Conversely,
holding of AAA would fall from 44.96% (pre-bonus) to 39.83% (post-bonus). This issue is made, mainly
to avoid any foreseeable litigation by any shareholder of REL for excluding REL from bonus eligibility,
inspite of REL holding pari-passu shares.

R Power in its statement issued to BSE, has stated that "The reduction of Mr. Ambani's shareholding in
Reliance Power by 5% from 45% to 40% represents a contribution of nearly Rs.5,000 crore (US $ 1.2
billion) by him, in favour of nearly 6 million investors in Reliance Energy and Reliance Power." This
statement is a wrong statement as value of 6.14 crore share of R. Power, to be given by AAA to REL
shall be about Rs.1,800 crores, calculated on ex-bonus basis. Why sacrifice of promoters are presented
in such a way by glorifying the absolute numbers?

Remember, effective cost per share to both the promoters viz. REL and AAA is Rs.16.93 per share. So
on actual cost basis, it is about Rs.104 crores only.

In another statement, it was stated that R-Power market capitalization is over Rs.94,000 crores, which
is true based on closing price of 22-02-08. However, on ex-bonus basis, it maybe, close to Rs.72,000
crores, if calculated at Rs.300 per share, on ex-bonus basis.

Also, notice by REL to BSE states that R. Power is implementing power projects with aggregate
capacity of over 28,000 MW. Of this, the company has only 6 power projects, for 7,060 MW, as

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"Identified Projects" for which cost of project and means of Finance has been worked out and these
were intended to get financed from the IPO proceeds while balance of Rs.22,835 crores to be financed
by debt, out of total project cost of Rs.31,789 crores.

Remaining 6 projects for 21,140 MW were under development for which, not much headway or
progress has been made like feed stock tie-up, land procurement, financial closure or order of
equipments, plant and machinery etc. Obviously, financing of these projects would dilute the equity
of the company from Rs.2,260 crores and will also raise debt of the company beyond Rs.22,835 crores.

So, why this project glorification? Enquiries are considered as orders and loans as profit.

The present bonus issue would materialize by 1st week of April, considering about 24 days for postal
ballot and 14 days for record date. Till that time, share price is likely to move between a range of
Rs.445 to Rs.465 per share, as on every rise, beyond Rs.450, would witness selling. This may result in
an ex-bonus price between Rs.285 to Rs.300 per share.

Hereafter, the share of R Power would get valued purely on fundamentals, for which NTPC, maybe, a
right comparison. NTPC is presently valued at a PE multiple of 20 times, on historic earnings of FY 08
and at a price to book of 3 times. Since NTPC is into existence for years, its book value is reflecting
very low cost, for its power generating capacity. The present market capitalization of NTPC is at
Rs.1,65,000 crores while enterprise value is about Rs.1,80,000 crores considering net debt of
Rs.15,000 crores. This give a per MW valuation at Rs.6.50 crore as NTPC has a present generating
capacity of 28,000 MW. The present cost of new power project is Rs.4.50 crore per MW for thermal
while Rs.6.50 crore per MW for Hydro. So on break up value of assets method, share is valued at about
1.4 times.

Going by these parameters, even R-Power stock should get valued on the same basis, as no premium
for such long gestation period or to the group can be given. Identified project of the company would
go on stream, earliest on December 09 being 300 MW of Rosa Phase I while 3,960 MW Sasan project
will start from May 2013, with its final commencement from April 2106.

In these circumstances, the issue of bonus share should be viewed more as compensatory issue to
correct the higher price charged by R-Power. Investors now holding shares from IPO, are advised to
exit above Rs.450 while those who have exited earlier, have no option but to regret.