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Reliance's Power Play

Posted on: Thursday, 10 January 2008, 12:00 CST

The scene was straight out of the movies. Inside Mumbai's famous Taj Mahal Hotel on Jan. 7, the gracious Crystal Room was packed to capacity. Brokers from all over town were excitedly discussing the big event that was about to occur -- the announcement of a $3 billion initial public offering of Reliance Power. When Reliance Power Chairman Anil Ambani introduced the IPO and explained how it would benefit shareholders, an appreciative rumble went through the crowd.

The gist of the offering? A total of 260 million shares -- 10% of the company -- will be offered in the range of $10.30 to $11.45 per share, with a listing in February. The offering will fund the construction and development of 13 new power generation projects across India, producing a planned 28,000 megawatts.

"In spite of this being the largest-ever IPO in Indian history, the issue will meet expected strength," said Anil Ambani at the end of a long eulogy to his father, Reliance founder Dhirubhai Ambani. "We are about to see in the power sector what we witnessed in telecom," he added, referring to India's phenomenal growth in cellular subscription. India now has the fastest-growing cellular market in the world, with over 220 million subscribers and annual growth of 40%, and Anil Ambani is executive officer of Reliance Telecom, one of the country's top operators.

Energy Shortfalls Fuel Demand for Shares There's no question the issue, massive as it is, will be a huge success, thanks in large part to the reputation of the Ambani brothers. The major shareholder of Reliance Power is Reliance Energy, in which Anil Ambani has a 34% stake. Some of Anil Ambani's private investment companies own the rest. One of India's largest power generators and distributors, with 941 megawatts of installed capacity, Reliance Energy was the best performer among Indian stocks last year, rising 310%. On Jan. 7 the stock price hit a 52-week high thanks to enthusiasm about Reliance Power's upcoming IPO

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Anil and his older brother Mukesh are India's most ambitious and feared businessmen, known for delivering over 100% returns on investments to their shareholders. The IPO is so hot that the gray market is already betting that the stock will start trading at over $20, almost twice the offer price.

The deal is also likely to benefit from India's desperate need for power. The country needs nearly twice the 135,000 megawatts the national grid generates. Power shortages are common -- nationwide, there's a 14% shortfall during peak hours -- at a time when manufacturing is expanding and consumption is increasing. According to the International Energy Agency, a Paris-based organization affiliated with the Organization for Economic Cooperation & Development, by 2030 India will need an investment of $1.25 trillion in energy infrastructure alone.

Little Planning, Experience But Reliance Power is also perhaps the most controversial IPO in India's history. Few fund managers or power sector analysts will say anything critical about Reliance Power for fear of incurring the wrath of the influential Ambani family. Some daring ones, though, get straight to the point. "I'm wary of the euphoria," says Devina Mehra, chief executive of Mumbai's First Global Securities. The market is behaving as if deals such as Reliance Power "are the hottest thing going," she adds. "Nobody is looking at the sustainability of the projects."

So far Reliance Power has no real business except ambitious construction projects. The company has a plan to produce 28,000 megawatts of power from the 13 projects, the last of which will be operational in 2014. According to the company's prospectus, the new, 2007 startup has revenues of $562,000 and a net profit of $317,000 -- not a cent of which has come from power generated by its business. Analysts assume the revenue comes from trading or consulting.

Moreover, though the Reliance group of companies has an excellent record in building petrochemical plants, Anil Ambani has no experience in building power plants. The company's strength, the prospectus says, is its "large, diversified portfolio of strategically located power generation projects" that it plans to build. In addition, the company touts the experience of the Reliance group in the Indian energy sector, as well as the group's brand and India's desperate power needs.

While Reliance Power has ambitious plans it still hasn't tied up all its fuel supply sources, save for two projects -- the first phase of the 600-megawatt Rosa plant in the northern state of Uttar Pradesh, where it has a contract for coal, and in Sasan, in central India, where Reliance has a captive coal mine to support its planned 3,960-megawatt project.

Family Squabbles For the remaining six coal-fired plants, which will generate 9,700 megawatts of power from domestic and imported coal, import deals have yet to be signed. While that's not unusual in the industry, it's not a good sign for a company without a single project in operation. Analysts point out that the company has yet to begin the process of land acquisition for more than ten of its projects in India -- a laborious and painful process at best.

Another potential drag on Reliance Power comes from a battle between the Ambani brothers. Anil and brother Mukesh, who split their family assets in a public spat three years ago, are locked in a court battle over the supply of gas to the company's proposed power plants in the northern state of Uttar Pradesh. Mukesh, the chairman of Reliance Industries, wants to be paid the current market rate, which is twice the price agreed three years ago, while Anil wants to enforce the existing contract.

Still, retail investors are clamoring for subscription issue forms and just about every investment bank in India has lined up to be among the ones chosen to take the company public -- local and international names such as Kotak, Enam, JM Financial, Deutsche Bank (DB), UBS (UBS) and JPMorgan Chase (JPM). "A Reliance issue is always oversubscribed -- and all merchant bankers want to be part of it," says one analyst.

Source: Business Week

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