Power on…Will India follow?

warning-electricity-2.JPGThe buzz is on. The awaited IPO of Reliance Power is just round the corner and is ready to hit the galore with a BANG! Not only Reliance Power, all its subsidiaries and sister concerns are having a gala time also. Reliance Money has already opened more than 5 Lac accounts mainly for this IPO and RCom is busy ringing the power music whenever you call any reliance mobile. REL’s share prices have hit an all time high.

But is the scene as rosy as it seems? Or is it going to be a bubble trouble for the investors who are quite fancy about this IPO? The answer will take few months to materialize but lets try to get the hard lines out of the sound proof doors of ADAG to you!

The company Reliance Power has entered into non-bidding MOUs with REL, Reliance Power Transmission and Reliance Energy Trading for services and arrangements. It, currently, has no power plant in operation or other revenue-generating operations and hence has no significant operating history from which we can evaluate its business, future prospects and viability. Also, their projects which are under development have a long gestation period. The failure to complete project development within the required time period could render certain benefits granted by the government unavailable and therefore may affect the profitability of the company directly…

The plans of the company require significant capital expenditure and if it is unable to obtain the necessary funds on acceptable terms of expansion, it may not be able fund its projects and the business may be adversely affected. The company has 13 power projects under development with a total estimated cost of Rs.1, 121,286 million. The company intends to finance 70% to 80% of the cost of each of its prospective projects with third-party debt and therefore is expected to incur substantial borrowings in future.

Nine of its power projects under development are planned to be coal-fired or gas-fired thermal projects. Reliance Power’s operations will have significant fuel requirements, and with the rising fuel prices, it may not be able to ensure the availability of fuel at competitive prices. Some of its projects have the benefit of captive fuel supplies or have long-term coal allocations from the government; however, it may not be able to arrange the same for other plants. For instance, RPL intends to procure coal for Shahapur Coal and Krishnapatnam, and gas for Shahpur Gas and Dadri through RNRL, but it has not yet entered into any definitive agreement with it.

Also, Reliance Power is showing negative cash flow from operating activities of Rs.3.1 million for fiscal year 2006 and Rs.4.4 million for the six months ended September 30, 2007. This was principally due to decrease in trade of Rs.69.3 million in the last reported 18 months.

The company develops power generation projects through SPVs that are wholly or majority owned by it. As it currently has no operating history, hence its future ability to pay dividends will depend on earnings, financial condition and capital requirements of its subsidiaries and the dividend they distribute too RPL after tax. Also, the depreciation of Rupee against foreign currencies, increase in interest rates, rising fuel prices may affect its performance further.

Well, i guess your mind would be swinging by now! So, test your adrenaline levels before investing in IPOs, even if it is the mighty Reliance Power!

Saurabh Sharma