Review of Reliance Power IPO

The much awaited “Reliance Power IPO” is all set to hit the markets on 15th January.

How good is this IPO? Should I invest in Reliance Power IPO? What are the basics to look for while investing in the Reliance Power IPO?

Before we get into the details, let’s look at some of the latest news items.

More than 1 lakh Demat Accounts will be opened in next 3 days just for the Reliance Power IPO. People stood in the queue for hours in various brokerage firms to get the accounts opened for their family members. Just for getting a demat account so that they can apply for the maximum possible number of shares in the Reliance Power IPO.

Grey Market Trading: is going on for this IPO. Against the offer price band of somewhere around 400 to 450 Rs. per share, the current grey market price is trading at a whooping 900 Rs. or so (as per the news) – almost double that of the offer price.

What do the above news items tell us?
First thing – the IPO is eagerly awaited. And it will be heavily subscribed. No doubt about that. But what it means to we, individual investors? It will mean less allotment and hence hopeless returns than what we expect. The mathematics of IPO share allotment and probability calculations are covered in this article.

If we go by the grey market trading prices, then the Reliance Power Company at the grey market rate of 900 Rs. will be valued at something like 2 lakh crores. Current valuations suggest that even if the company manages to double the proposed power production, then also it will take atleast 3-5 years for the company to justify the price of 900 Rs. a share or a 2 lakh crore valuation. That too everything goes well with double the proposed production. So from the valuations perspective and the grey market trading prices, the issue does not look very attractive even in the long horizon of 3 to 5 years. May be the company discovers something really great and that turns out to be a great profit making business, otherwise the grey market prices are not justified.

However, we need to understand that the grey market prices are the once that are setting the returns expectations. If one can get out of this expectations business, then it may be justified. Still due to the euphoria, the less allotment of shares will mean no significant profits.

As covered in the article, Stock Picking: Good Company v/s Bad Company, I had quoted the example of TCS IPO. That IPO also had grey market trading. Against the offer price of around 775, the grey market price was trading at 1200. However, on the listing day, the closing price of TCS was just 998. What happened?
No one knows. Even though the grey market trading was going on at 1200, the close price was 998, well below 20% of the grey market trading price. Later, in a few months, it went down further.

Some day or the other, the market comes to its senses. For TCS, it came to sense on the very first day – later even more. What can happen with Reliance IPO, only time will tell. Both Reliance and Tata are well trusted houses in India, so definitely the craze that went on for TCS IPO, much more than that will be for Reliance Power IPO.

Now the problem does not stop there. Let us not forget what happened with the IndiaBulls IPO and the follow up. IndiaBulls shares were offered at 16 Rs. However, it started climbing like crazy and went up like a rocket. Seeing that performance, Other brokerage firms like IL&FS, who were initially planning to launch their shares at a mediocre rate, doubled or even quadrupled their IPO price. The list includes IL&FS, Religare and recently concluded Motilal Oswal issue.

If this Reliance IPO is successful, then JP Associates and other power companies are also in the line. They will become very demanding for their IPO, which might ultimately trigger a high price for the entire power sector.

Ultimately, what can be done here? To invest or not? Well, I have always been of the “Randomness Opinion”, and the probability value calculations tell me that my money is better safe in the bank Fixed deposit savings account. One may take a chance, lucky if you are allotted, unlucky if no or less allocations. All the best!

Table of Contents Tabular Details of Reliance Power IPO Part Payments