Power Turmoil Over?

bull.jpgAfter a bit of a break from the volatility and uncertainty, markets tried to get some momentum in the pre-budget sessions. However, the process was hampered by the anti-market budget and contributed only to worsen the wounds. Markets fished to even lower levels in March and breached the 17,000 mark to reach 16,400. It is still not clear whether the markets are bottomed out or, worse, the bleeding is still on.

In this whole bear run, the sector that saw its worst days in the last few years was the power sector. The big names got down to earth, with their share prices dipping. Even the long term investors started a selling spree in the sector. This started with the much haloed Reliance Power initial public offering (IPO), which proved to be one of the worst IPO in the financial year, and simply the worst in the Reliance pack. Reliance Power tanked on debut, a huge disappointment to investors after their frenzy to be a part of India’s biggest initial public offering, which had seen the $3 billion issue fully subscribed in less than one minute. To appease investors, Ambani announced a special bonus issue for Reliance Power shareholders other than the founders, which included Reliance Energy. Reliance Power’s shares, which had fallen by a quarter in a few days after listing, climbed back to the IPO price of Rs. 450, but the stock has again fallen and closed at 376.25.

The prices of Anil Dhirubhai Ambani Group (ADAG) shares, which were the most profitable ones in year 2007, giving 200% return on an average, were the worst performers on the bourses. This proved that market is the best equalizer. Reliance Energy Ltd, the sister concern company of Reliance Power, on Wednesday said that it would buy back up to $500 million worth of shares at a premium of up to 9.6% to the market price, which it said would counter a perceived undervaluation. Reliance Energy, part of the Anil Dhirubhai Ambani Group (ADAG), said that it would pay Rs. 1,600 per share in the two-tranche buy-back, which it said should reduce volatility of the share price. The company would spend Rs. 8 billion ($200 million) in the first phase and Rs. 12 billion in the second phase for the buy-back. Anil Ambani, his family members and investment firms together hold 34.68% in Reliance Energy, according to data from the Bombay Stock Exchange.At Rs. 1,600 each, that would equal 12.5 million shares in total. Reliance Energy has 236.5 million shares on issue, according to the Bombay Stock Exchange. Reliance Energy said the offer reflected management confidence in the company, and sent a strong signal to markets on the share’s perceived undervaluation. Reliance Energy, valued at about $9 billion, was the top performer in India’s main stock index in 2007, when its share price quadrupled. But its shares have fallen 31.6% so far this year, more than the BSE index’s 18.5% drop, and are down 44.5% from a record high of 2,631.70 rupees hit on January 10.Analysts had said the buy-back might have been aimed at restoring some shine to ADAG companies, after a dismal stock market debut of the much-hyped Reliance Power Ltd last month, as it awaits approval to list another telecommunication unit. But on all the measures taken by ADAG, analysts feel that it might not have a significant impact on the stock price as the current market outlook is not good. Reliance Energy, which has transferred its future power projects to Reliance Power, trades at about 38 times its one year forecast earnings, against 20 times for NTPC Ltd, which generates a quarter of India’s power. On the other hand, rival Tata Power’s shares trade at a multiple of 42, and shares in Reliance Industries Ltd, India’s largest listed company, trade more than 23 times their forward earnings, according to Reuter’s data. This means that still it’s not cheap on the Price Earning (PE) basis and so still has space for bottoming out.In conditions when the state run Rural Electrification Corporation (REC) is about to be listed and ADAG is coming out with lot many plans to boost its energy units, the positions are expected to go up. Government is also giving incentives and waivers to the infrastructure sector in which power enjoys a major pie. So in the scenario, it will be interesting to see how the power sector performs in the coming days.Saurabh Sharma

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